For example – A construction business
Calculating the lifetime value of a customer for a construction business involves estimating the total revenue that a customer is likely to generate over the course of their relationship with the business. Here are the steps to concretely calculate the lifetime value of a customer for a construction business:
Determine the average revenue per project: To estimate the lifetime value of a customer, you’ll first need to determine the average revenue generated per project. This can be done by analyzing the historical data of the business and identifying the average revenue earned per project. For example, if the average revenue per project is $50,000, this would be the starting point for calculating the lifetime value of a customer.
Estimate the number of projects a customer is likely to have: The next step is to estimate the number of projects that a typical customer is likely to have with the construction business. This can be based on historical data, market research, or industry benchmarks. For example, if the average customer has two projects with the construction business over their lifetime, you would use this figure in the calculation.
Determine the gross margin of the business: To calculate the lifetime value of a customer, you’ll also need to know the gross margin of the business. This is the difference between the revenue generated and the cost of goods sold. For example, if the gross margin of the business is 20%, this means that for every $100 in revenue generated, $80 is the cost of goods sold and $20 is profit.
Calculate the lifetime value of a customer: Once you have these figures, you can calculate the lifetime value of a customer. The formula for this is:
Lifetime Value = (Average revenue per project x Number of projects) x Gross margin
Using the figures from the previous steps, the lifetime value of a customer would be:
Lifetime Value = ($50,000 x 2) x 20% = $20,000
This means that a typical customer for the construction business is likely to generate $20,000 in profit over their lifetime. This figure can be used to guide the business’s marketing and customer retention strategies, as well as to make decisions about how much to invest in acquiring new customers.