Customer Lifetime Value
- April 30, 2009
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Anyone in a service business should have a notion of what a customer is worth to you. The concept of a lifetime value of the customer has been around a long time and Wikipedia is a good reference: Customer Lifetime Value. But the basics are pretty simple: take your typical contract value, your typical retention rate, and then run the math to figure out how many times the average customer renews…
I think the main thing that becomes clear, is that customers have a lot more value than the value of the initial contract would suggest. If you’re retention (renewal) rate is 90%, the value is close to 9x the inital contract. Of course, for longer term relationships, you also have to factor in some discounted value of future dollars to present value. Good article here by Tom Karlo that breaks this down (with an actual formula) using a website customer example, but it is important to keep these ideas in mind for any business, because repeat customers are the lifeblood of successful businesses.