Why is customer lifetime value important?
Would you continue selling a product if you lost $15 on the first sale to a new customer?
If you think "no", keep reading...
$15 is unprofitable. No doubt about it.
However, customer lifetime value = the revenues you can expect from a customer over the time they are your customer is something worth looking at for long term gain.
Take this protein as an example:
- Has a $30 sales price
- Has product and fulfillment costs of $15 (assumption)
- Has a customer acquisition cost of $30 (assumption)
On one sale, the company may have lost money:
$30 revenues
- $15 product/fulfillment
- $30 acquisition
= - $15
However, they sold it to me through Amazon and had emphasized their special subscription pricing that includes a 5% discount on each monthly order.
I'm subscribed to one shipment per month at around $28 and I can expect to be a client for about 24 months.
The revenues they can expect from me (aka customer lifetime value) is as follows:
24 months x $28 = $672
The expenses to fulfill my orders might be:
24 months x $15 = $360
The profit on me as a customer after acquisition cost:
$672 - $360 - $30 = $282
$282 is profitable and is an example of why you should focus on customer lifetime value instead of a single sale to a customer.
What are your thoughts?
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