The Marketing Metric that Drives Your Business

How much your leads are worth? How long do your customers remain customers? Do they buy from you once, then move on? Or do they typically buy two times, three times, four times? More? When you make one sale, how many more sales can you expect that customer to buy? How long do they stay with you after that first sale? What is the lifetime value of your customers?

If you don't know the answers to these questions, your business could be in trouble. Driving traffic to your site is an important part of your online business, but having lots of visitors does not necessarily equal lots of sales. It's knowing how to convert those visitors into customers that adds money to your bank account.

To stay in business and predict future success, you must know the lifetime value of your customers. Knowing this figure allows you to know exactly how much you can afford to spend to get new leads and still turn a profit.

The lifetime value of a customer is measured by the value a customer brings to your business throughout that customer's entire relationship with you. It's the monetary value your customers bring to your business over a period of time.

In other words, you need to know how long your customers stay with you after that first sale. To better understand lifetime value metric, you need to understand the five essential elements involved in calculating this metric:

--Lifetime/LifeCycle: (This is not to be mistaken for the length of time your customer lives in terms of years on this earth.) This describes the length of time the customer stays with you from the first sale to the last purchase. The longer the lifetime, the more valuable that customer becomes. Because that means he's buying from you on a continual basis for a certain amount of time.

--Value: This is the dollar amount your customer is worth and figures all the orders this customer makes throughout his lifetime with your business. By totaling the dollar amount this customer spent and then subtracting production costs, retention costs and acquisition costs, you get the net profit. The net profit equals the value your customer brings to your business in monetary terms.

--Recency: This refers to how recent a customer your customer actually is. How long ago did the customer make a purchase? If it was yesterday, that customer is recent. If it was last year, that customer may not really be a customer anymore.

--Latency: This is the average time period between purchases. Through tracking customer behavior, you can determine the average time that lapses between product purchases.

--Friction: This disrupts the latency period. When customers are dissatisfied for some reason, they leave or don't buy when they are expected to buy. So as the friction increases, the lifetime value decreases. But as the friction decreases (fewer things lead to customer dissatisfaction), value increases. Not as much is disrupting the next purchase, so they purchase more. When the latency period lapses between expected purchases, though, you know friction exists.

You can figure the average lifetime value of all your customers, but to truly benefit from this metric, you need to track the lifetime value of different groups of customers. What is the value of the group from your PPC ads? Newsletter ads? Search engine traffic? Blog traffic?

Some of your traffic-generating methods may be bringing a lot of visitors to your site, but those visitors may not be converting into customers. Also, paid sources of traffic may not bring you as many visitors but have a higher conversion rate.

And some customers may not cost you anything to acquire, but they may not stay with you very long either. Those that may cost you more to acquire could possibly stay with you longer, make more purchases and become your most loyal and responsive customers. Or vice versa.

That's why it's important to track the customers you generate from your different advertising campaigns. When you know which sources of traffic bring you the customers with the greatest lifetime value, you can focus your attention on generating traffic through those sources.

You are then able to attract better customers who are more responsive to your advertisements and accurately budget more effective marketing campaigns. Even if you are just getting started, you can benefit from estimating this number and getting in the habit of tracking it. By doing so, you are in a much better position to succeed in business.