Life Time Value Of A New Customer

When a business is considering how to evaluate their marketing plan they need to have a clear handle of what the outcomes are that they can measure.  One of the main purposes of your marketing plan is to attract new customers. What is a new customer worth?

Well, they are worth the profit you make on their first transaction, and every subsequent transaction they make for their lifetime.  If you are a barber and a new customer get their hair cut once a month they are worth the cost of the haircut time twelve for as long as they come back on an annual basis.

If they get their hair cut every two weeks, they are worth twice as much.  If they stay with you for five years on average, because most people in your market area move every five years, you can multiply that total by five to get your lifetime value.

Now you will loose some of these people from time to time to any number of other reasons. Therefore you need to estimate this lifetime value with as good a sense of attrition as you can come up with.  And you need to make sure you are attracting enough new customers to replace them, and grow your base. But that is another topic.

If your product cost more than a haircut, that value is correspondingly greater. If your customer buys only once or twice a year or once or twice a lifetime, it could be lower.

There are multiple reasons to think about the lifetime value of a new customer. It helps you decide how much you can spend on marketing to attract that new customer.

It also is useful to stimulate your thinking about how you might be able to increase their lifetime value. For example, what can you do to extend their lifetime? Can you develop a personal relationship so they still come back for their haircut even after they move to new suburb in your metro area?  Building loyalty by way of building a strong relationship is one way of extending the life time value.

If you are able to build that positive relationship, you may also build their long term value by getting referrals from them. A customer that refers new business to you is certainly adding to their life time value to your business.

Additionally, you may well be able to move them up a ladder from a hair cut to a haircut and shave or what ever might be equivalent in your business.  While your entry customer may be willing to buy your bargain priced entry product, they may well be willing to invest in higher quality, higher expense products once they have developed a trust relationship with you.

Once you have a customer, it is easier to get them to buy again. The hardest customer to get is the one who has never bought from you before. When considering your marketing campaign you want to focus on both. When you do so, be sure to think in terms of each customers life time value to your business.

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