What is the Lifetime Value of 1 New Customer?

In his groundbreaking book on customer service, “Customers For A Lifetime”, author Carl Sewell explains how businesses can justify spending more on customer service based on the lifetime value of a customer.  Carl Sewel, the owner of the Sewell car dealerships, calculated that over a lifetime, each of his customer purchased an average 7 new cars. Those purchases would generate hundred’s of thousands in sales revenue. He reasoned that if each customer has the potential to generate that kind of revenue, he could easily justify spending money on breakthrough auto service amenities like a free car washes and free loaner cars to increase customer satisfaction. Today, these amenities are common place but it was Carl Sewell who understood the value of a lifetime customer that have him the confidence to invest in customer service and forever change car dealer customer service.

Understanding the lifetime value of each new customer can also give you the confidence to invest more in many other areas of your business including advertising to gain a new customer. Even if your customers only purchase once in a lifetime, they still can be the source of additional sales through their referrals.

Below is a formula for calculating the lifetime value of one of your customers. First, you need the following information:

• The average dollar amount a customer spends with you in a year? (Divide the total number of sales by the total number of individual customers)
• Average gross profit percentage? (includes variables cost of goods/labor only – does not include fixed expenses such as overhead)
• The average number of years each customer purchases your products/services

Example:

Average dollar sale per customer per year:                                 $5,000

Gross profit margin:                                                                     40%

Gross profit per average sale:                                                      $2,000

Number of years as a customer:                                                  5

Gross profit per customer:                                                           $10,000

Number of referrals:                                                                    2

Gross profit from referrals                                                           $20,000

Total Lifetime Customer Value:                                                   $30,000

Knowing that the lifetime value of 1 new customer is $30,000 (plug in whatever your number is), would that give you confidence to invest some of the profits into customer service, marketing, hiring staff, buying better equipment, etc.? You bet.

Plus, it will get you even more motivated to get up each morning knowing that each new customer can provide you the income you want to obtain your personal dreams.

Knowing the lifetime value of 1 new customer can change everything.