Determining the Lifetime Value of a Customer

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Last week, I met with Scott Dennison, an internet marketing consultant from St. Petersburg, Florida. I met Scott a few years ago through a mutual client and have always enjoyed his knowledge and insight. He is a super nice guy and we share a lot of the same philosophies on how to help clients build an online brand and maximize profits using the latest technology out there. I subscribe to his weekly newsletter and highly recommend it to anyone looking for good, quality information about online marketing.

Scott blogScott Dennison, Bill Webster and I met for coffee and talked for a while about the various changes in the online marketing industry specifically in regards to search engine optimization and how content marketing has become so important for businesses. We talked about how to create value for the services we offer and effectively communicate that to our clients. So much of what we do is behind the scenes and often that gets lost in translation. There was one thing that he said that really struck a chord with me and that was that before you can determine how much a client needs to invest in online marketing they must first determine what the lifetime value of a customer is to them. Online marketing is an investment. How do you determine that value and how much should you invest back to continue to grow?

lfe time value of a customerScott defines the lifetime value of a customer by the amount of an average sale x the number of sales per year x the number of years that customer typically remains a customer. He also factors in the number of referrals that client refers to you and how many of those referrals become customers. For example, if John Smith is a regular customer that spends an average of $350 every time he visits you online (or offline) each month. He also has referred over 20 people each year for the past 5 years he has been a customer, 5 of which become customers. How much is John worth to your business? According to Scott’s calculator: $546,000.

With that value in mind, how much should you be investing back into your online marketing efforts to gain more customers like John? That is ultimately up to you and how quickly you want to grow your business but many people will advise you to invest as much as you are seeking in return. In other words, if you want a $100k customer, you will need to invest $100k to attract the right leads, convert them into customers and keep them as loyal customers for years to come.

Still not sure? It is a big decision and will determine the future of your business:

  • Talk to specialists in your industry and find out what is working for them.
  • Meet with online marketing experts to discuss what types of options might be right for building your company.
  • Interview more than one company and choose wisely but choose to do something.
  • Consider a short term commitment (less than 1 year) so you can determine if they can get you the results you are seeking.
  • Look for a company that fine tunes their strategy based on the latest technologies, products and services you offer and above all the reports that illustrate how and why the strategy needs to be modified.
  • Technology is always changing and so should your strategy.

    • Would you like help determining a marketing and technology strategy to grow your business? Contact me. I can help.

    Thank you,

    Erika Rossi-Raia
    erika@shiftdigitalmedia.com
    SHIFTDigitalMedia.com

    Check out Scott Dennison’s Lifetime Value Calculator

    1 comments
      Livefyre
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    Howie Goldfarb
    Howie Goldfarb

    I like this post Erika. Being a Finance/Sales guy I would be careful when determining some of the inputs. Industries, Technologies, Economies etc change. If I used the $540k number in 2007 and John Smith was a high flying real estate investor s was his friends in one year his future revenues to you could be zero as well as his referrals.

     

    The key variable when determining the value of a publicly traded stock is the expected growth rate. Past earnings are never used. They are past. You can't get them back. This is why Apple has technically crashed. So I would suggest being very conservative when determining future revenues vs optimistic.

     

    This w