What is Average Customer Lifetime Value
Traditional business philosophy is that it is often more expensive to acquire new customers than it is to generate repeat sales from existing ones and that existing sales are more profitable due to the reduced marketing expense. This strategy is very effective for offsetting the affects of rising pay-per-click costs.
While most businesses consider only the value generated from a customers first purchase, a business using an average customer lifetime value considers the value generated from all of a customers purchases.
Customer lifetime value is the average time period a customer has a relationship with your business and the total revenue generated during that relationship. A relationship is defined as the time between the customers initial purchase and their final purchase from your business.
For newer businesses, the life-time number is estimated based on loyalty expectations while older businesses with years of customer purchasing history can generate loyalty measures from their actual internal statistics. In either case, understanding your customer lifetime value is important regardless if you rely on relative estimates or historical stats.
How Do You Calculate Your Average Customer Lifetime Value
To calculate your average customer lifetime value you will need to gather the following:
How long you have been in business.
Your best estimate of the time between an initial customer purchase and their final purchase. (Typically a year or two but ideally based on your unique business cycle.)
Your total sales.
Your total number of customers.
Although not covered in this article, you may also want to gather the costs you incurred so that your customer lifetime value shows your breakeven point.
The basic formula for calculating your average customer lifetime value is:
Average Lifetime Value = (Total value of all sales) / (Total number of customers)
For new businesses without ample customer purchasing history, your formula may be more like:
(Time length estimate for how long your average first time customer will remain a customer)(Length of time you have been in business)
Example of an Older Business With Vast Customer Purchasing History:
For example, you have been in business for three years and through studying your customer purchasing history you have discovered that on average, your customers make their first and final purchase within one year. So, one year is your customer lifetime.
Over the past three years you have generated $760,000 in revenue from 2,300 customers. Before moving forward, you ideally want to remove any new customers who have not yet exceeded one-year customer lifetime. To do this, just take your average sales value times all less than one-year customers and deduct it from your total revenue. Then deduct the less than one-year customers from your total customers.
Lets say your average sales value is $175 and there were 500 less than one-year customers. Now take your adjusted revenue of $672,500 ($760,000 - $105,000) and your adjusted total customers of 1,800 (2,300 500) and perform the calculation.
Average Lifetime Value is $672,500 / 1,800 = $373.61
Your average customer lifetime value is $373.61! So while many businesses under this example may consider their customer value at $175 (the average value of a sale), a business using average customer lifetime value considers a customer worth $373.61. This perspective opens new strategic opportunities.
Example of a New Business Without Vast Customer Purchasing History:
Unlike the first example, lets say you have only been in business for one year and you have little customer purchasing history; therefore, you are not confident that your initial customers have made their final purchases.
In this situation, you need to estimate how long you expect a customer will remain loyal and continue purchasing from your business.
In this example, assume that your customers will remain loyal and continue making purchases for three years. You have generated $250,000 in revenue during your first year from 800 customers.
First, calculate your average customer lifetime value using your known one-year revenue and customers data.
Average Lifetime Value is $250,000 / 800 = $312.50
Now, you need to calculate the approximate value based on your expected customer lifetime of 3 years. Convert your years into months and divide the number of months an average customer continues buying from you by the number of months you have been in business.
36 months / 12 months = 3
Now, multiply this number 3 by your average customer lifetime value of $312.50 to generate your expected customer lifetime value: $312.50 x 3 = $937.50.
Although this number is not as reliable as the one generated by a business with years of actual customer purchasing history, it does provide essential information for a marketer to determine customer lifetime value. The risk is losing your average customer before they reach the three year lifetime expectation so be conservative when estimating this!
How is Your Average Customer Lifetime Value Used for Pay-per-Click Bidding
Similar to how large businesses approach capital investments through calculating payback and return on investment - understanding your average customer lifetime value enables you to make decisions today based on longer term payback and returns forecasts.
Lets look at an example that really shows the power of using your average customer lifetime value.
There are two companies: Company A. and Company B.
Both have been in business for the same period of time, 3 years and both sell the same product at an average sales price of $175.
Both companies perform pay-per-click using Overture (a.k.a. Yahoo Search Marketing Solutions) and want to bid on their primary but expensive keyword, brand X. The first eight bid positions in Overture for keyword Brand X are between $2.75 and $1.85 per click.
Further, Company A. does not consider average customer lifetime value while Company B. does. Lets define the parameters for Company A. and B.:
Company A. Company B.
(Uses Avg. Customer LTV)
Average Sales Price $175 $175
Customers in Past 3 Years 4,000 4,000
Revenue in Past 3 Years $2.1 million $2.1 million
Lifetime Period Unknown, doesnt calculate 2 years
Website Sales Conversion Rate 1% 1%
The Scenarios:
Company A. pulls out their calculators and figures out that for every 100 website visitors they generate $175 in revenue. At the current bid prices, an eighth bid position at $1.85 per click would cost them $185 to generate $175 sale. They decide that keyword, Brand X is too expensive and they drop out of the bidding competition.
Company B. though calculates their average customer lifetime value.
They researched and discovered that their customer lifetime is two years. They first remove any new customers that have not completed their two-year lifetime and calculate their average customer lifetime value. Assume there are 600 less than two-year customers and they represent $105,000 in revenue. They deduct these numbers from their totals and calculate the following
Average Lifetime Value is $1,995,000 / 3,400 = $586.76
Company B. assesses their ability to bid for Brand X using their average customer lifetime value. Like Company A. they figure that for every 100 website visitors they generate a $175 sale. At the current bid prices, first position at $2.75 per click would cost them $275 to generate just a $175 sale. BUT, its OK! Their average customer lifetime value is $586.76 so they know they will make over $311.76 from that customer over their lifetime. Impressive!
This is a simple example however it proves the power of understanding your average customer lifetime value. The critical step for Company B. now is to implement customer retention strategies that increase their average customer lifetime value.
Do YOU Know What to Do as Your Pay-per-Click Bid Costs Increase
If you have read all three articles, you have discovered three powerful strategies for offsetting the affect of raising pay-per-click costs. In summary, they include: (1) Understanding your Performance Metrics (2) Maximizing Your Website Conversion and (3) Calculating your Average Customer Lifetime Value.
Now as your competition shies away from increasing pay-per-click bid costs, you are armed with the strategies to confidently dive right into the empty pool of wanting customers. And while your competition is ignorantly chuckling about how much money you must be losing by bidding on such high cost per click keywords, youll be laughing on your way to the bank with an overflowing pocket of cash!
Kevin Gold is a Founder of Enhanced Concepts and a published author. If youre interested in increasing your leads or sales, get a free copy of Understanding Your Conversion Rate and 12 Surefire Ways to Increase Your Website Conversion by visiting
There is a new advertising style from Google Adsense that is available in your Adsense panel, it is called Google Ad Links.
This new ad system presents a list of 4 or 5 vertical links(you can pick either 4 or 5 and Google will supply the actually links) to your site visitors, when the visitors click on one of the targeted contextual words it displays a results page from Google listing ten Adwords advertisers ads for this related topic.
Here is what Google says Adlinks are:What are Ad Links by Google
Ad Links are a new form of text advertising that were offering to our AdSense publishers. Using the same contextual targeting algorithm that targets Google ads to your content pages, Ad Links units display a list of topics that are relevant to your page. Each topic, when clicked, brings the user to a page of related advertisements.
The result is advertisements that are closely targeted to the interests of your users. By selecting the topics through interaction with the ad unit, users are presented with useful information in the form of related advertisements. Their direct involvement with the evolution of the ad unit guarantees an interest in the ads that are presented.
Positive Aspects of Adlinks:
They allow you to blend this in with sections of your links which will get more visitors to click on them, inevitably increase your Adsense revenue.
The Adlinks ads display 10 ad results when clicked without cluttering you page.
Googles rules allow you to place three Adsense code block on a website. If you are doing this near say a 500 word article it can distract the visitor from viewing the article. With Adlinks you can still display 1 block of normal Adsense code and the Adlinks block and it keeps your page relatively nice looking while still giving you revenue potential.
Negative Aspects of Adlinks:
Adlinks requires your visitors to make two clicks. One on the original Adlinks block and one when they view the Adlink results. As any marketer knows the more actions you need a visitor to take the less the response rate.
Where are the best places to display Adlinks ads
The best place to display them are within your navigation menu. Try to make them blend in as best as possible.
Another great place to put them is at the end of an article suggesting an interested reader view these resources. When doing this the reader is very targeted since they red your whole article and if they are likely leaving your website, why not let them leave through Adlinks and make some money
Are Adlink ads as effective as the normal ad blocks
Well some have seen positive results while other have not. Personally I am going to test it some more to see what kind of results and make my decision then.
Need Great Web Hosting Click Here ->