I was reading an excellent report a while back from Carlos and Lupe Garcia called “Secrets to Getting Mass Traffic.” In the report they talked about the importance of metrics and all the different metrics you should monitor in your online business when you’re buying online advertising. One of their key metrics, which we’ve all heard people talk about for years, is that of “Lifetime Customer Value.”
But what does one mean by “Value” in this metric? The natural tendency for most people is to say it represents the total sales revenue you generate from a particular customer over their lifetime of being a customer of yours. But that definition is very, very dangerous.
What value should represent in this metric is PROFIT. I think we should call it “Lifetime Customer Profit” to more clearly define what we really mean. Why? Because you MUST factor in your costs of earning that lifetime of revenues into the equation. How much did you pay out in affiliate commission? If you were selling a physical product what were the production costs associated with that sale? How much did your advertising efforts to generate that next sale cost you? What other internal overhead expenses need to be accounted for?
Value really represents Revenues Minus Costs (Profit). If you get careless in how you calculate your Lifetime Customer Value you can fool yourself on how much you’re really making on a customer. And therefore, how much you can afford to spend to acquire a new customer. Miscalculate this and it can get very dangerous to your financial health.
I hear a lot of folks talk about how they can afford to spend $20 to generate a $20 sale. But if that sale only represents $5 or $10 profit then you’d better really know your backend sales profit to that customer to truly know if you can really afford to spend that $20.
Marketing masters from Jay Abraham to the late Gary Halbert have long espoused the virtues of the metric “Lifetime Customer Value.” Just be sure you recognize fully that value doesn’t represent revenues, it represents profit.