Oregon Small Business Development Center Network

What is the lifetime value of a customer?

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A look at small business questions from the Southwestern Oregon Community College Small Business Development Center (SBDC).
By Arlene M. Soto CMA, CGBP, Southwestern SBDC Director

What is the lifetime value of a customer?

Simply put, the lifetime value of a customer is a calculation of how much your customers will spend, how often they will buy and over what period of time they will be shopping at your business. The formula to calculate the average value of a customer is (average sale amount) X (the number of purchases per month or year) X (the number of months or years the typical customer visits your business). For example, if you have a restaurant and the average ticket price for a meal is $12 and the average customer eats there twice a month for five years the value of that customer would be $12 x 2 x 60 for a total of $1,440. But why is this important?

The main reason lifetime value of a customer is important-- creating a budget. Knowing how much an average customer spends and how often they shop helps determine the revenue that the business can reasonably generate. It also helps determine an advertising expense budget including discounts and promotional items. No business can afford to spend more on attracting and keeping a customer than that customer spends buying from the business. To determine a reasonable amount to spend attracting and retaining customers look at the overall profitability of the business and determine a reasonable percent to spend on marketing.

Not all customers are average customers though. Some are excellent (high value) customers and others create more problems than the revenue then they generate for the business. In the book Bust a Myth: Delivering Customer Service in a Self-Service World, Barry Moltz and Mary Jane Grinstead suggest a more complex formula for determining the value of a customer that includes qualitative as well as quantitative factors. They add factors such as how quickly the customer pays accounts receivables, how often they refer your business, the feedback they give you, what they say about your business to others and how many additional products or services they buy from you. They suggest those customers that rate higher on a point scale should receive more attention than the average clientele.

The SBDC is a partnership of the U.S. Small Business Administration, the Oregon Small Business Development Center Network, the Oregon Business Development Department and Southwestern Oregon Community College. Arlene M. Soto has been the Director of the Southwestern Small Business Development Center since July 2007. To ask a question call 541-756-6445, e-mail, or write 2455 Maple Leaf, North Bend, OR 97459. Additional help is available at the OSBDCN Web page