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January 8, 2021

The tricky part of calculating customer lifetime value

The only way to know the ROI of your marketing is to know two things: customer acquisition cost and lifetime value.

Your acquisition costs are relatively easy to determine. It’s ultimately the total amount spent on marketing divided by the number of new customers you signed up.

Where it gets tricky is the lifetime value.

As a marketing consultant, you need to know this stuff for your clients. So let’s let into it.

There are several ways to calculate lifetime value. It varies depending on whether you have a recurring revenue business, sporadic repeat purchases, one-time purchases, or several other factors.

Your goal is to create a fair estimate at the total amount your clients or customers will net your company over the lifetime of their relationship with your business.

That is your lifetime value.

But most people stop the calculation at the expected lifetime revenue or profit of that new customer. They don’t account for referrals. 

Referrals are a funny thing. One customer may refer you to two people over the lifetime of their relationship with you.

And then one of those two people may refer you to two more people over the lifetime of your relationship with them.

You get the picture.

Suddenly, the lifetime value is not anything near the original revenue- and profit-based models.

Each client has their own lifetime value, and the initial referrer has a much higher one.

The real question is, should you calculate those into your lifetime value calculations?

Maybe, but I’d rather not put it into any spreadsheet or budget calculations, personally.

I’d rather aim for a positive return on investment scenario even if nobody ever refers anybody.

Why? Because then it gives buffer if things go wrong or you miscalculate. 

Referrals are an extremely valuable and important source of new customers, regardless of who you are.

You should absolutely know how many of your new clients come from referrals, and if it’s a lot, you might justify adjusting your customer lifetime value accordingly.

But for the most part, I like to plan ROI scenarios conservatively and treat referrals as a bonus.

That might just be

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