How much is a list of customers worth?
Like many important questions, the answer is: It depends.
In a contracted business like mobile phone service it’s easy to see how many customers you have, what they will pay, and how long their contract will last. In other business models it can be more challenging. Using a restaurant as an example, the frequency of visits can vary widely depending on the economy, holidays, increased or reduced competition, weather, and even what’s on television.
It also depends on what you are going to do with your customer list. If you are going to give it to the guy with the polyester tie to put the safe, customers on the list may just suffocate; whereas, if you hand it to the marketing department they can baby it and watch it grow.
Either way, in a given time period, the retention rate is the percentage of customers you keep on your list and churn rate is the percentage of customers you lose.
Customer Lifetime Value From An Accounting Perspective
From an accounting standpoint, customer lifetime value (CLV) is the present value of anticipated profit from the future customer relationship. The way it’s calculated can vary based on business models and required degree of precision.
Here are the broad steps:
Remaining customer life
Expected future revenues
Revenue delivery costs
Net present value of future dollars
Here’s the math:
(Avg Monthly Revenue per Customer x Gross Margin per Customer) ÷ Monthly Churn Rate
For example, the family cell phone plan is $180 per month working out to $128.25 each. A contract runs two years for a CLV of $3,078. Multiply this by the number of people on your list.
When the lifecycle of your products is longer than a year, you also have to recognize that money now is more valuable than money in the future and apply a discount rate to the calculations. An accountant can help you figure out the correct multiplier, because a common mistake is to use an interest rate.
Lifetime Customer Value From A Marketing Standpoint
When you know the average value of customers, you know how much you can spend to acquire or retain a customer and still stay profitable. It’s okay to give away $200 phones to get $3,000 customers.
You can further break down the list into different levels of profitability. Perhaps creating loyalty cards and a different spend budget for each distinct list.
Another option is to justify a marketing budget increase of $100 per customer by proposing a CVL increase of $1,440 through the addition of two data plans per family contract.
List Value Of Customers For Customer Service Teams
If your restaurant customers are worth $50 a month you can comp them an annual piece of birthday cake. When they are worth $5,000 a month you can offer them a bottle from the wine list each month. By knowing the value of customers you know when to bend and went to stand firm in service.
Knowing the lifetime value of customers on your list is powerful.