What is one customer worth to a business, and what should a business be willing to pay to acquire the said customer?
It all comes down to a concept called “customer lifetime value”, which is used to describe the approximate value of one customer to a business. It is essentially the average amount of money made over the lifespan of an average customer, discounted by future cash flows.
Calculating the Lifetime Value of a Customer
The higher the value, the higher the marketing budget can be to acquire each customer. This is not only a key concept to understand in business, but also for investors that are looking to put money in consumer-oriented companies.
Original graphic by: KISSmetrics