Do You Know the Lifetime Value of a Customer?

I am amazed at how often I meet with a business owner and ask them what the Lifetime Value of a Customer (LVC) is for one of their “ideal” customers and they have no idea. In case you’re not familiar with this concept, the goal is to determine roughly what a loyal customer would spend with you over their lifetime of purchases with your business.

To get a very, very rough idea of what the LVC is for one of your customers, take their average purchase amount, multiply it by the number of times they purchase from you in a year and then multiply that by the total number of years you expect them to be a customer.

For example, I have been eating breakfast at Bagels Unlimited in the 34th Street Plaza for nearly 17 years (I have chased them from location to location as they’ve moved).

When I’m not traveling, I typically eat there once or twice a week and then take my wife in on both days on the weekend. On average, I spend about a hundred dollars a month eating breakfast at Bagels Unlimited. Multiply that by 17 years and you see that so far, my value to that business has been about $20,400.

There is a good chance that as long as Bagels Unlimited stays open, I will be going there for breakfast (and lunch sometimes) for another 17 years—hopefully longer. Therefore, my total lifetime value as one of their loyal customers is roughly $50,000. Yikes, that’s a lot of bagels, egg whites and iced tea!

This estimation does not take into consideration the fact that I have brought many people there for business meetings and referred many of my friends to Bagels Unlimited, so there is a good chance that I have helped bring them an additional $20,000 or $30,000 of lifetime business.

In the same Plaza is another business I frequent: Aquatropics. I have three koi ponds in my backyard and have been buying fish, plants, fish food and other supplies from them for 15 years. I spend about $60 a month for everything I need for my ponds, which means in the last 15 years, I have spent just less than $11,000 at Aquatropics.

Again, as long as they stay open, there is no reason in the world to think that I will not continue to buy $60 a month worth of products from them for the next 15 or 20 years. That means that every time I walk into their shop, they should think, “Here comes a loyal customer who’s going to spend $25,000 or more with us to take care of his Koi ponds.”

You can do the same thing with my dry cleaner, lawn service and car dealership. Actually, if you are a loyal customer to a specific car dealership, there’s a good chance that your total lifetime value to that dealership is anywhere from $250,000 to several million dollars if you refer a number of your friends to buy cars from them.

The reason I tell you this is to help you realize how valuable your best customers can be to your business and to show just how important taking extremely good care of them is (like Bagels Unlimited and Aquatropics takes of me). If you look at single transactions, mustering the energy to deliver superior customer service may be hard, but if you think about the total LVC of a loyal customer, you realize that you cannot afford to give them anything less than your very best!

John Spence is the author of Awesomely Simple – Essential Business Strategies for Turning Ideas into Action. He is an award-wining professional speaker and corporate trainer, and has been recognized as one of the Top 100 Business Thought Leaders in America and also as one of the most admired Small Business Experts in the nation.

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1 Comment

  1. Freddy Carr

    John,

    Well done! Concise and to the valued point. It really makes you think about
    importance of long term relationships. Good Job!

    FGC

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