Calculating the Lifetime Value of a Customer

Last week, Marka and the FEI tribe discussed how tracking the results of their marketing activities could help them make more intelligent decisions in the future. This week, the tribe reconvenes to discuss how determining the lifetime value of a customer can help their business arrive at its ROI. Remember, fire = print.

The tribe convened in the conference room one morning to find Numo and Marka already huddled over a big sheet of paper.

“Uh oh,” Zoot remarked. “This looks like math.”

“Tracking the cost of each sales conversion will allow us to determine the ROI of our promotional activities and consequently make more financially intelligent marketing decisions,” Marka said.

“We start by figuring out the lifetime value of a customer using that data,” Numo explained, then scribbled on the paper:

Avg. annual revenue per customer ($)
x Avg. length of time as a customer (years)
x Discount factor for future value of money
= Lifetime value of customer

“There we are!” Numo exclaimed. Few things thrilled him more than a good equation. “Once we’ve figured out the lifetime value of a customer, we can use this number to determine the lifetime value of a lead.” [He then added more scribbling:]

Lifetime value of customer
x Lead % closed
= Lifetime value of a lead

Numo was barely able to contain himself. “Once we know these numbers, and assuming we’ve been tracking the source of each lead and referral, then we can determine the ROI of each marketing promotion like this.”

Number of leads generated
x Lifetime value of a lead
÷ Cost (out of pocket costs x costs of employee time)
= ROI

“If little or no time elapses between lead and sale—with retail coupons, for example—then the ROI calculation is even simpler,” Numo continued.

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T.J. is team leader of Grow Sales, Inc., a marketing and social media services company operating at the intersection of compelling content, clear vision and quality communication practices. In this blog, fire is a metaphor for print. Hang on, this ride will be weird...Prometheus crept into Mt. Olympus, stole fire, returned to the lowlands, ran from house to house distributing it, got caught, was chained to a rock, lost his liver to a huge ugly bird and was rescued by Hercules. Leveraging his fame, Prometheus started Fire Enterprises Inc.  (FEI). Since fire was the hottest technology of the time, company success came fast and furious. Two generations later, fire isn't such an easy sale. Now led by Prometheus' grandson Org, FEI's growth is non-existent, competitors are pounding and prices are in the toilet.
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