What is a customer worth? The ten-minute calculation
As long as you don't know what a customer earns you over their lifetime, every marketing decision is a bet. The math fits on a napkin.
"Advertising is expensive." Expensive compared to what? Without knowing what a customer is worth, there's no way to answer. Paying $80 to acquire a customer can be a bargain or a hemorrhage — it all depends on what that customer brings in afterwards.
The basic calculation
- Average basket: what a customer spends per visit or per order.
- Frequency: how many times a year they come back.
- Lifespan: how many years they stay a customer, on average.
- Multiply the three. That's a customer's lifetime value, in sales.
A simple, purely illustrative example: a customer who spends $150 per visit, comes back three times a year and stays four years is "worth" $1,800 in sales. At a 50% gross margin, they're worth $900 in margin. Suddenly, spending $80 to acquire them doesn't seem expensive at all.
Why margin, not sales
Because you don't deposit sales at the bank. Do the math in gross margin: that's what pays for the advertising, the salaries and everything else. It's a finance person's reflex — and it's precisely the reflex missing from most marketing decisions.
What this number unlocks
A clear acquisition ceiling: what you can afford to pay for a new customer, without kidding yourself. An honest read on loyalty: extending a customer's lifespan by one year is often worth more than an entire campaign. And a fair test for any marketing vendor: "Does what you're proposing increase the basket, the frequency or the lifespan? If not, what does it increase?"
Ten minutes, three multiplications. It might be the most profitable calculation of your year.
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