Customer Lifetime Value is a metric that is crucial in determining the ROI of marketing costs. There is a finite amount of cash for small business marketing and you really need to know if there is a payback on marketing.
In simplest terms, if you spend $3,000 on marketing/sales and get 10 new customers it costs $300 to acquire each new customer. This is the customer acquisition cost.
Customer Acquisition Cost without any context is not a useful metric for small business marketing. It is like confusing Cash Flow with Revenue or Profit. Determining Customer Lifetime Value allows you to place context around acquisition costs.
Customer Lifetime Value = (Revenue - Gross margin).
For detailed instructions, you may want to download our FREE Ebook Marketing Metrics Every Business Owner Needs To Understand.
The determination of Customer Lifetime Value provides clarity past the initial sale. You spend $1,000 on Google AdWords and you generate $2,000 in revenue. This looks like a great ROI on ad spend. It may appear that you simply subtract Ad spend from Revenue and you made $1,000.
Customer Lifetime Value takes you past this simple calculation and forces you to look at Gross Margin. This will include overhead expenses. It is also beneficial to break down Customer Lifetime Value into the various acquisition channels. Not every customer behaves the same. Look at Organic vs Paid channels and customer lifetime value. Is a specific channel bringing you once and done customers?
Do organic customers have a better lifetime value than customers from paid advertising?
What organic content provides the best customer lifetime value? Which paid channel provides the best value?
This can all seem a bit overwhelming so we created an Ebook that will step you through this process.