Everyone understands this simple concept: Your business will only succeed if you have enough revenue to fund all your costs and make a profit. So, revenue is the key to success. And since revenue only comes from customers, we can re-write the simple concept above by replacing revenue with customers … Your business will only succeed if you have enough customers to fund all your costs and make a profit. If you don’t know your 4 key customer metrics, you don’t know how many customers you need to be successful, you can’t build a plan to acquire them, and you can’t build your customer acquisition costs into your P&L.
Before we look at the 4 key customer metrics, keep in mind the following:
> Estimating these numbers is completely fine. Don’t let the lack of perfect information paralyze you. You can always update them as you get better data.
> Start by using averages. Yes, customers in different segments will have different profiles, but if you start with the averages, you will get 80% of the benefit for way less than 20% of the effort.
The 4 Key Customer Metrics:
1. Avg. Lifetime Revenue. The amount of revenue the average customer generates over their lifetime before they discontinue being a customer. How do you know when they are no longer a customer? This is determined If they have not made a purchase in a set period of time, usually 12 months for most businesses. It could be shorter or longer based on the avg. purchase frequency.
2. Avg. Customer Lifetime: The number of months an average customer remains a customer. See #1 above to determine when customer has lapsed. The amount of time between their first purchase and last purchase is the customer lifetime.
3. Avg. Customer Acquisition Cost. The average cost to acquire an incremental new customer.
4. Avg. Customer Lifetime Value: The amount of gross profit an average customer generates over their lifetime. This is simply the Avg. Lifetime Revenue multiplied by your avg. Gross Margin rate.
Now it’s time to look at your data, apply some assumptions, and estimate the values for these 4 key customer metrics for your business.
