Twitter! Facebook! AdWords! SEM! PPC! SEO! If you have ever googled around for “small business marketing online,” you have probably found at least half of these terms, presented with used-car-salesman enthusiasm as the end-all of online advertising solutions. You have probably even been cold called and cold emailed by self-proclaimed “SEO Gurus” and “Online Advertising Gods.”
With so many people trying to sell you their own flavor of Kool-Aid, it’s easy to succumb to information overload and decide to just stay away from online advertising altogether. Or you might end up trying a little sip of each flavor, not really know if they are good or not, and leave it at that. Either way, it helps to have an easy way of keeping score and measure if a particular form of small business marketing is paying off for you or not. One of the most basic ways of keeping score is your Customer Lifetime Value (CLTV).
What is Customer Lifetime Value?
There are many different ways of measuring CLTV, and some of them can get pretty complex (see this very comprehensive infographic on the subject). The concept itself is pretty simple: When a new customer comes through your door for the first time, how much money will he make you before he is not a customer anymore?
The three numbers you need to do a basic CLTV calculation are:
- How much money does an average customer spend per visit / project?
- How many visits / projects do you receive from an average customer?
- How long do you usually retain your customers?
You may not have all these numbers, but taking an educated guess is a great way to start.
Then, take these numbers and do some simple math:
(Avg. Spend x Avg. Visits x Total Lifetime of Customer) = CLTV (Revenue)
It might make more sense to measure profit per customer, since that is the money that you actually get to keep:
(Avg. Spend x Avg. Visits x Total Lifetime of Customer x Profit Margin) = CLTV (Profit)
Why Does CLTV Matter for Small Business Marketing?
The next time you find yourself evaluating a new form of advertising, consider this: If it costs you $100 to acquire a new customer, and your CLTV is $150, you will make $50. If your CLTV is $75, you will lose $25. It’s that simple.
Or if business has been slow, think of what you can do to increase each of the variables to make your customers more valuable. How can you sell your customers a little bit more when they already have their wallet out? How can you turn occasional customers into more regular customers? How can you keep loyal customers longer?
Do you know how much your customers are worth? What kind of small business marketing has worked for you? Please let us know in the comments below.