How to Determine What’s a Customer Worth?

This critical marketing statistic is always a “want to know” by marketing consultants, investors, and outside parties interested in your business. And you better know it! There’s a lot of things to know if you’re in business:  revenue, profit margin, inventory turns, return on invested capital. But determining what’s the value of each of your customers over his or her lifetime is probably one of the most important. After reading this post you’ll know how to determine what’s a customer worth and should write down the answer, engrave it on your forehead, post it over the refrigerator, your desk or smartphone and share it with your employees.

Why is this statistic so important?

Because any business owner looking to achieve long-term success must determine how much you might be willing to spend to acquire a new customer. This enables you to shift your focus from mass transactions and simply making a buck in the short-term to building trust and establishing lifetime relationships that will undoubtedly pay off. And, just as important, it forces you to realize how much it costs you to lose a customer once you’ve got him or her!

Starbucks has taken the correct view in a competitive market and focuses on the value of a customer. If a true fan buys one cup of coffee a day (at $7 each), that’s $49 a week, or $2,548 a year. If a customer gets angry over a $7 cup of coffee and switches his business to a competitor, Starbucks loses thousands of dollars. That’s why every Starbucks is probably willing to spend $100 to satisfy an angry customer or get someone addicted to coffee or espresso. A hundred dollars is a small price to pay to keep an $2,548 a year customer.

To determine the value of a customer, answer these three incredibly simple questions:

  1. If you continue to provide good service and quality, how long will the customer buy products or services from your business?
  2. How much money will this customer spend on your products or service in a year?
  3. Multiply the amount of money spent in a year by the length of time this customer purchases your goods and/or service.

The result is the lifetime value of this customer.

Question: Was this helpful in determining the lifetime value of a customer?