Lifetime Value Of A Customer
By Terry Roberts

Regarding the Web, there is a lot of buzz these days around concepts like CPM, click-through rates, cost-per-sale and cost per contact.

With the fast pace of Web developments, perhaps a short-term focus is inevitable. But I suggest that some attention to a classic tenet of marketing could have a dramatic impact on the decisions we make when it comes to Web marketing.

That tenet is the "lifetime value of a customer," or LV for short. The basic definition of LV is the total amount of sales revenue the average customer contributes to the company over the life of the relationship. Being able to determine that number is one of the many arguments for the importance of a customer database. By capturing all sales by customer in a database, the company can easily determine average lifetime value.

Once LV is known, one of the most strategic marketing questions that can be asked and answered by the company is, "How much are we willing to spend to secure a new customer if the LV of that customer is $X."

As you might imagine, the answer to that question is very different from the answer to the question, "How much are we willing to spend to secure one sale?" The difference often results in a much more thoughtful and higher-caliber marketing effort.

To take the example we've seen kicked around on this list, if a banner ad's CPM is $30, and the click-through rate is 3%, then it costs $1 to generate one visit to the site. If you're selling a $14.95 widget, the margin dollars may not justify that $1 marketing cost. But if the lifetime value of that visitor is $200, then that same $1 marketing cost suddenly becomes highly attractive and justified! In fact, the company may be willing to invest much more to secure that first sale.

But there is an even greater benefit to thinking in terms of lifetime value. It helps shift the company's focus from *getting a sale* to *creating a relationship*, and to thinking about what's possible to *keep and grow that relationship.* Also, once the focus is on LV, a focus on how to *increase* LV quickly follows. By necessity, that requires the company to emphasis quality of service, smart cross-selling, up-selling, and all sorts of other marketing strategies and tactics.

If the company is so new that there cannot be a known LV, it's never too early to start capturing the data to create one and updating it regularly. If nothing else, an LV can be estimated in the early stages.

The long and short of it is that thinking long-term leads to better marketing choices than thinking short-term.

Terry

Terry Roberts Consulting & Services Seattle WA Customer-centered marketing for a digital world. (Copyright 1997) Web: http://www.troberts.com Voice:206-650-6769 Fax: 206-640-5299 E-mail me@ Terry Roberts to subscribe to the NetNurturing Letter, an e-letter about keeping & growing customer relationships via the Internet.

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