The four numbers every company needs to know and that most don’t By Ust Oldfield
1. Customer lifetime value (CLTV)— The sum of the future money you will get from a customer. Too many companies make the mistake of thinking they can calculate one number for their entire customer population. It’s more useful and accurate to segment a population and then calculate a different CLTV for each segment. This is the number that guides your marketing spend and marketing methods.
2. Cost to acquire a new customer— Add all of your acquisition expenses for the year and divide by the number of new customers you acquired. Then hope your answer is less than the CLTV. If it isn’t, you need to change your business model.
3. Money lost on each one-time buyer— Subtract the acquisition cost (number 2, above) from the median gross margin on a first time purchase. Generally this is a negative number; they cost you more than you spent to acquire them. A consumer usually needs to make multiple purchases before the gross margin on those transactions exceeds the cost to acquire the customer. Until that happens, the customer is unprofitable. When you multiple this dollar amount by the number of one-time buyers, you get a scary picture of how much these single purchasers are costing your company, and hopefully some resolve to fix the problem.
4. Retention rate—What percent of your customers from your last period are still your customers this period? Is your retention rate improving or getting worse? Is your bucket of customers overflowing, filling, or leaking? As one of my networking contacts wrote me after reading an early version of this post, “Preventing base erosion is a red-hot concern, especially in rough economic times when every penny matters.”
As more and more marketers convert to the discipline of making “data-driven decisions”, these are the data points that should drive many of those decisions. We think it is difficult to be an effective marketer today without knowing these numbers.
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