In my last article, I explained why it is important to focus on customer retention and left you with the formula for Lifetime Customer Value(LCV). I will now walk you through an example so that you can calculate your own LCV.

You will recall that LCV is the value of a customer to your company. It is a measure of how much profit the customer will bring to you over the life of the relationship that you have with that customer.

LCV = (sales per customer) x (estimated number of times the customer will reorder) x (number of referrals) x (percentage of referrals that become customers) – (cost of sales)

sales per customer = estimated average sale by customer estimated number of times the customer will reorder = customer lifetime number of referrals made = estimated number of referrals the customer will make cost of sales = cost of goods x customer lifetime

annual sales per customer = $300 customer lifetime = 3 years number of referrals made = 10 percentage of referrals that become customers = 15% cost of sales = $180 x 3 years = $540

($300 x 3 x 10 x 0.15)-($189 x 3) = $1350 - $540 or $810 gross profit per customer

What if you don’t have the data to calculate the LCV? Don’t worry, you can easily start with some guesstimates and refine them as you collect more data.

Calculate your LCV in 5 Easy Steps:

1. Take your total sales and divide it buy the total number of customers that you’ve sold to in a given period. This is your sales per customer.

2. How many times do you think the customer will reorder a particular product or service? This is the customer lifetime.

3. The old adage "A satisfied customer tells no one. A dissatisfied customer tells 10 of his friends." is old for a reason. Today, a satisfied customer can make a casual reference on her blog or post a comment in a forum about the wonderful shopping experience that you provided. That comment could be read by thousands of people!
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   = (sales per customer) x (estimated number of times the customer will reorder) x (number of referrals) x (percentage of referrals that become customers) – (cost of sales)

   sales per customer = estimated average sale by customer estimated number of times the customer will reorder = customer lifetime number of referrals made = estimated number of referrals the customer will make cost of sales = cost of goods x customer lifetime

   Just how much is that customer worth? Let’s put some numbers around this. Below is some hypothetical data from an online clothing store that sells trendy jeans, belts and accessories like rings, bracelets, earrings and necklaces.

   annual sales per customer = $300 customer lifetime = 3 years number of referrals made = 10 percentage of referrals that become customers = 15% cost of sales = $180 x 3 years = $540

   ($300 x 3 x 10 x 0.15)-($189 x 3) = $1350 - $540 or $810 gross profit per customer

   This means that the LCV is $810. By upselling and cross-selling, you can make much more profit from your existing customer.

   What if you don’t have the data to calculate the LCV? Don’t worry, you can easily start with some guesstimates and refine them as you collect more data.

   Calculate your LCV in 5 Easy Steps:

   1. Take your total sales and divide it buy the total number of customers that you’ve sold to in a given period. This is your sales per customer.

   2. How many times do you think the customer will reorder a particular product or service? This is the customer lifetime.

   3. The old adage "A satisfied customer tells no one. A dissatisfied customer tells 10 of his friends." is old for a reason. Today, a satisfied customer can make a casual reference on her blog or post a comment in a forum about the wonderful shopping experience that you provided. That comment could be read by thousands of people
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      worth? Let’s put some numbers around this. Below is some hypothetical data from an online clothing store that sells trendy jeans, belts and accessories like rings, bracelets, earrings and necklaces.

      annual sales per customer = $300 customer lifetime = 3 years number of referrals made = 10 percentage of referrals that become customers = 15% cost of sales = $180 x 3 years = $540

      ($300 x 3 x 10 x 0.15)-($189 x 3) = $1350 - $540 or $810 gross profit per customer

      This means that the LCV is $810. By upselling and cross-selling, you can make much more profit from your existing customer.

      What if you don’t have the data to calculate the LCV? Don’t worry, you can easily start with some guesstimates and refine them as you collect more data.

      Calculate your LCV in 5 Easy Steps:

      1. Take your total sales and divide it buy the total number of customers that you’ve sold to in a given period. This is your sales per customer.

      2. How many times do you think the customer will reorder a particular product or service? This is the customer lifetime.

      3. The old adage "A satisfied customer tells no one. A dissatisfied customer tells 10 of his friends." is old for a reason. Today, a satisfied customer can make a casual reference on her blog or post a comment in a forum about the wonderful shopping experience that you provided. That comment could be read by thousands of people
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         This means that the LCV is $810. By upselling and cross-selling, you can make much more profit from your existing customer.

         What if you don’t have the data to calculate the LCV? Don’t worry, you can easily start with some guesstimates and refine them as you collect more data.

         Calculate your LCV in 5 Easy Steps:

         1. Take your total sales and divide it buy the total number of customers that you’ve sold to in a given period. This is your sales per customer.

         2. How many times do you think the customer will reorder a particular product or service? This is the customer lifetime.

         3. The old adage "A satisfied customer tells no one. A dissatisfied customer tells 10 of his friends." is old for a reason. Today, a satisfied customer can make a casual reference on her blog or post a comment in a forum about the wonderful shopping experience that you provided. That comment could be read by thousands of people
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            per customer.

         4. How many times do you think the customer will reorder a particular product or service? This is the customer lifetime.

         5. The old adage "A satisfied customer tells no one. A dissatisfied customer tells 10 of his friends." is old for a reason. Today, a satisfied customer can make a casual reference on her blog or post a comment in a forum about the wonderful shopping experience that you provided. That comment could be read by thousands of people! You can make a conservative estimate as to how many people will hear about you through your customer. This is the number of referrals made. You can start asking new customers how they heard about you.

         6. As much as we’d like to think that everyone that comes to us will buy something, not every referral will result in a sale. Guesstimate the percentage that will buy. This is the percentage of referrals that become customers.

         7. Finally, take your total cost of goods (or services) and divide it buy the total number of customers that you’ve sold to in a given period. Multiply this by the customer lifetime you calculated earlier. This is the cost of sales.
         If you are listening to your customer and are truly there to help, you will discover many opportunities to increase sales. As your customer goes from a single purchase to a loyal, lifetime customer, your investment in initially acquiring that customer gets recouped.

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