How (and why) to calculate Average Customer Value

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Average customer value is a metric that can greatly improve your business and when you use it you will be able to better calculate your targeting, advertising investment, and customer support.  ACV is a good measure for the health of your business because it is largely a measure of repeat customers.

Knowing how frequently a customer buys from you can help you to better gauge how much you can spend to bring in a new customer and how much you can spend to retain that customer.  That’s the why on calculating ACV or Customer Lifetime Value (CLV), now let’s get to the how.

Here’s the easiest formula for ACV that I’ve come across: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).

So, if you have a subscription plan for $40 a month, the period could be three years, which would be 36 repeat transactions.  So, plugging the numbers into the formula ($40 x 12 months x 3 years) we come up with an ACV of $1440 or $480 per year,

Given this, you have a benchmark for determining how much you can spend to to acquire a new customer.  If you have a low ticket item, either as an affiliate marketer or your own product, you can plan your advertising to cover your costs and hopefully provide a reasonable return on your investment,

It is in the repeat sales that you will make your largest profits.  Once someone has purchased something from you, the relationship between you and them has changed.  If they have a good experience with what they purchased from you, they will likely be even more open to purchasing something from you in the future.

Once you know what your return on investment needs to be, you can fix your advertising and marketing budget accordingly.  In internet marketing, the common benchmark is $1 a month for each person on your mailing list.  Obviously, you don’t sell everyone on your list a $1 product every month.  But the metric works out to $1 a month per subscriber.

If your ACV is above this, this means that you can spend even more on advertising and marketing, and increase your profits even more.  That’s the scalable nature on internet marketing at work and ACV can help you plan to do this.

Addendum: When you’re starting out you can use one very simple metric: are you making more than you’re spending?  You can’t get any more simple than that.  Tonight I received an email from an email marketer tonight that mentioned two other metrics: cost of acquisition (COA) and immediate customer value (ICV).  I’ll cover these in another post.

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