3 Steps to calculating customer value
Calculate the lifetime value of your customers to better understand their spending habits. This will give you a clearer view of potential revenue and profit you can achieve from your target market.
Customer value illustrates how much revenue each customer brings into your business, it's a useful metric for planning business growth targets and potential profitability.
Step 1: Measure individual and lifetime purchase values
Purchase value data can reveal how much your customers are spending based on various factors, including the average amount a customer spends in a single purchase, as well as how long they’ve been buying from you.
Average Purchase Value (APV)
Total value of orders / Number of orders over a particular period = APV
The average amount a customer spends in each purchase. This can help you understand:
If products and services could be offered or promoted differently.
If pricing could be changed to extract more value.
If marketing and advertising is increasing APV, or not.
Lifetime Value (LTV)
APV x Average purchase frequency rate = Customer value
Average customer lifespan x Customer value = LTV
How much a customer spends with your business from first to most recent purchase. This illustrates how many long-term, committed customers you already have, and can help you predict how many will remain loyal.
Case study example:
A major brand like Starbucks generates a higher APV by directly promoting extras including syrups, limited edition coffees, and a wide choice of snacks right next to the card machine.
Their drinks menu changes too, regularly introducing high value drinks offering a taste of something new, and encouraging higher value purchases.
Step 2: Calculate how often customers buy from you
Customer retention is vital in most industries, regardless of how much your APV is. Once a customer has been converted, their custom isn’t necessarily easy to hold onto. However, keep looking after their needs and enticing them back with new, relevant products, and your revenue will stay consistently positive.
Purchase Frequency Rate (PFR)
Number of orders in a period / Number of unique customers in the same period = PFR
How often the average customer buys from you. The higher the APV, the less frequently customers might buy from you. For example, high value purchases like furniture and sofas are generally made every year or two, rather than monthly. Whereas Starbucks drinks are relatively affordable, so regular customers will buy daily or multiple times a week.
Case study example:
Starbucks’ huge market penetration (29,000 stores in 80 countries) makes them a daily choice for commuters and office workers, as well as students and anyone looking for a quiet place to work. They’re a top choice for people staying in and taking away.
This has a significant impact on PFR, which is further boosted by their loyalty card scheme and easy mobile payments, which incentivise regular purchases.
Step 3: Review customer satisfaction
Numerical data is incredibly valuable, but qualitative comments and reviews are just as vital. This is where customers can really tell you what they think.
It’s important to ask for details and let people know you’re keen to listen, because customers often won’t volunteer their comments readily unless they’re overwhelmingly negative or positive. There’s still a lot of room for their thoughts in-between those two extremes.
Reviews and customer surveys can tell you:
What customers think of the overall buying experience.
How likely current customers are to purchase again (PFR).
How likely current customers are to purchase differently in the future (LTV & APV).
How likely customers are to recommend or refer people they know.
Case study example:
By 2007, Starbucks executive chairman Howard Schultz was concerned the coffee brand was losing its unique experience as it expanded. Customers were commenting that every store looked the same, and revenue had stalled too.
When Starbucks customers had criticisms, Schultz acted fast. He shut down every US location for an afternoon of staff training (costing roughly $6 million). It was worth it though – Schultz said it “helped reestablish some of the emotional attachment and trust” they had lost.
After retaining their status as the "preferred coffee shop", Starbucks began focusing on expansion again in 2016, this time in the Asia Pacific region, as well as ‘express stores’, roasteries, and drive-thrus in other locations, which they predict will grow US sales by 5%.
Increasing customer value in your business
Your business’ value is based on its ability to appeal to as many potential customers as possible and turn a profit. Pay attention to the data, and the comments they provide, and there’ll be no shortage of ways to improve profit throughout your business.
WANT TO LEARN MORE
Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.
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