How do you determine customer lifetime value?

May 20, 1999


From:  Violeta Selanteva
Date:  Tue, 18 May 1999

Dear Michael,

I feel confused because I need to determine the lifetime value of our customers, but there are so many approaches. I know that the average order amount per customer is $75, number of purchases per year is 1 with the interval of three years. Approximate gross profit is 30%. How can I calculate the customer lifetime value?

Thank you very much.

Sincerely,
Violeta Selanteva
Teva Sports Sandals

Answer

Date:  Thu, 20 May 1999

Hi Violeta,

Thanks for writing.

Keep it simple.

If I understand what you've told me, your average order is $75, one per year, with customers retained for an average of 3 years, and gross profit is 30%.

The lifetime customer value is 30% X $75 X 3 = $67.50.

You could spend up to this amount to acquire a customer and break even.

Now, think about how you can increase that value. How can you retain the customer for a longer period of time? What "back-end" products and services can you offer to increase the average order? Are you making "bounce back" offers to increase the average order? Can you increase your price slightly to increase your gross profit without significantly reducing your sales?

Good luck!

Mike Gray

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