So how much is a new customer worth to your business? Over a lifetime - Quite a lot!
One of the most important things you need to know in your business is the lifetime value of a new client or customer. The basic formula is dead easy. You need to work out how much your new customer will spend with you and over what period of time?
On top of this value, there are other factors that you may want to take into consideration. Will this new customer refer other customers to you? How profitable will these referrals be? How much or how little management will this new customer be?
New Customers: Return On Investment
Now this is where it gets ninja-like. Since you already know the lifetime value of your average customer. You now know how much it costs to acquire a new customer. Have you ever wondered how long it takes to make a new customer profitable? The relationship needs to first payback for the initial investment, including the cost of any advertising.
Action: Divide the cost of acquisition by the lifetime value in order to get the payback period. Here’s an example: If a new customer costs £400 to acquire and they provides £4800 in profit per year on average, the payback period is “400/(£4800/yr.) or 1/12 years or 1 month. You are therefore profitable with this customer after month 1, which would represent a great return on investment.
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