Finding the dollar value of loyal customers doesn’t have to involve algebraic equations or your revenue information from the last 10 years. It’s simple to calculate just how much loyal customers are worth to your business over time, and the results can be revealing for your business.
The customer lifetime value (CLTV) formula isn’t simple, but it’s accurate. This is what the formula looks like:
The ‘First Purchase Formula,’ on the other hand, is very simple to use and while it’s less accurate than the CLTV above, it can land you in the right ballpark for calculating loyal customer value. We’ll show you how to use it below.
The First Purchase Rule
Harris Interactive partnered with the U.S. Chamber of Commerce to do a study of 1,409 small business owners and with an annual company income of less than $25 million. One very important small business finding they came away with: On average, loyal customers are worth up to 10 times the dollar amount of their first purchase.
The First Purchase Rule: COST OF 1ST PURCHASE x 10 = EST. MAX CUSTOMER LIFETIME VALUE
To calculate a given loyal customer’s maximum value to your business over time, just plug the amount of their first purchase in and multiply it by 10. The resulting number is your estimated maximum customer lifetime value.
Exceptions to the rule
1. If a loyal customer spent $80 on their 1st purchase at your hardware store, how much might the customer be worth over the customer relationship lifetime?
On average, a loyal customer is worth up to 10 times the dollar amount of the 1st purchase – not necessarily always reaching that amount. Your job is to find a ballpark estimate that is still useful for your calculations.
If the first purchase was $80, we multiply that number by 10 to get the estimated MAX dollar value of the loyal customer – in this case, the customer value would be up to $800.
Important: Some loyal customers will translate to their maximum calculated value, yes, but most of your loyal customers won’t, even if they do come quite close. Remember to rely on these calculations only for broad estimations and not true projections.
2. A loyal customer spends a large amount on their 1st purchase – a swimming pool, filtration system, pool vacuum, steps, a variety of floats and pool toys, and a 10 year warranty. Would the ‘first purchase rule’ apply here? Why or why not?
The average above ground pool purchase costs about $3,000, so if we include all the extras, we’d estimate this first purchase at $4,000. Using the First Purchase Rule, that would mean this customer would be worth up to $40,000 over the course of the relationship. Whoa!
That’s too good to be true, right? Yes. There’s an exception to every rule, and if you were looking for the exception to this one, you found it. There’s something different about this purchase from the purchase in scenario 1 – frequency of purchase. Once this customer makes it out of the pool and spa store, they won’t have to return for a long time.
While they may never visit a competing pool and spa store, they also may not ever visit this store again. If they do, it will likely be to purchase small items like pool toys, chemicals, or patio furniture. A large purchase like this would not be indicative of a customer’s lifetime value.
Customer Experience Impact Report by Harris Interactive