hello this is Austin Bronner from bolded marketing.com and I'm here to talk to you about the most important stat you will ever calculate lifetime value of a customer and why your customers are worth more than you think the lifetime value of a customer when I talk to anybody new businesses any businesses I I work with I always tell them this is the starting point for everything in marketing you honestly cannot make effective marketing plans without knowing the lifetime value of a customer can be a little bit difficult especially if you're starting out and you're digging into it but this is always the first step whenever I I work with a new business I sit down we talk about it we work through figuring out what the lifetime value of their customers their lifetime value of a customer is and my advice to you is to keep calm and calculate on because it's the most worthwhile thing you can do for your business and will drive all marketing plans you make going forward so what is lifetime value of a customer well simply put the lifetime value of a customer is the amount of sales in dollars that a customer will spend with a particular company yours over their lifetime it's important because it helps you determine what you will earn later from what you're spending now so take a look at what you spend now and if you know the lifetime value of a customer you can make projections into what you will learn later it also is going to help you think about different ways to bring on new customers for example how much of a discount you can offer a new customer to bring them aboard as a customer knowing that you're going to return get some return down the road from them it also helps you choose pricing models but what I can tell you is sometimes when I'm digging into lifetime value you may think the same feel the same way I'm not sure if I'm doing math or learning Russian uh there's going to be and seriously it initially you may feel that way but let me tell you it'll be some math but I'll guide you through it'll be pretty simple so step one in calculating the lifetime value of customers well it's not exactly easy uh you have to go through with a formula this formula is lifetime value equals the average value of a sale times the number of repeat transactions times the average retention time I'm going to go through this slow so you understand average value of a sale what that means is every time a customer either comes to your website and purchases something or goes into your store whatever business you are running uh whatever the average sale complete order is that is the average value of a sale we multiply that by the number of ret repeat transactions within a year so um however many times they come by and repurchase within a year multiplied by the average retention time in years so if they your average customer sticks around three years that would be your average retention time so how else can you really determine marketing initiatives if you don't know how much your customers are worth you well the answer is you can't so what we're going to do is a little case study and go through a company I made up called Tyler's shoe company they've got your typical customer and their typical order they make shoes uh primarily women's shoes let's go through some numbers and calculate it out you can do the same thing at home and uh do this with your own business so let's start off average value of a sale we've determined to be $30.50 number of repeat transactions per year people are coming in uh a third of the people are going to come back twice in a year uh 1.34 is a number of repeat transactions per year average retention time on the low end we said two years you may not know your average retention time that may be something you have to estimate especially if you're a new business but you can the way you can do it is by searching for similar businesses in your industry and learning really what those companies are expecting their customers to come back at and you can make an estimate you can do a high and a low value for your life lifetime value that's very very helpful so moving forward we have our numbers here a b and c and what we're going to do is calculate the lifetime value of your customer so the first thing you need to do is take a average value of sale which is $30.50 multiply that by the number of repeat transactions per year which is 1.34 then by your 2 years the retention time and that is going to give you a number $817 what does that mean $817 24 cents this is how much revenue you will receive from each customer over their relationship with you over their lifetime so that is the top line revenue the question now is how much of that is actual profit let's take it a step further so we we know two things we know the lifetime value we know one thing we know the lifetime value is $81.65 what we don't know is how much we will keep out of the $81.65 how much of that is going to be profit so that lifetime value is how much they will spend over their lifetime and to determine how much we will keep we need to know our average margin uh and you can take a look in your business and see and determine run some numbers and figure out what on average is your markup and how much of each sale you're keeping for yourself this can be very complicated depending on what you're what company what business what model you have we're going to be very simple let's assume your average margin is 70% just purely an assumption here so your profit is that lifetime value times your average margin which in this case is going to be $81 times 7 or 70% which equals $572 that is the amount of profit you'll be receiving for every single customer every new customer you get and that'll be over their entire lifetime so what does it all mean what can you do with this well we can start to determine the amount of money that we can pay for each of our customers yes I'm saying pay for our customers because you break it down no matter what you're doing in marketing you're going to be figuring out some way I mean it's going to be related to paying for your customers you'll have to buy them there's different not necessarily buying giving them cash outright but typically a lot of the marketing plans that we dive into are going to cost some money so that doesn't mean we want to start now that we know that what our profit is doesn't mean we want to start throwing money around but it really is going to help you approach it in a different way so that's step one calculating out lifetime value if you want to learn more for more videos and information you can visit bolded marketing.com where I run a blog or you can email me at Austin bolded marketing.com with questions or comments would love to hear what you think about the video and if you've have any case studies or have done this yourself what you've run into so once again this is just a little simple overview thanks for checking out and uh look forward to talking to you again