Understanding how much a customer is worth to your business over their entire relationship with you – their lifetime value, or LTV – is crucial for smart marketing investment. It’s far more cost-effective to keep an existing customer than to acquire a new one, and knowing LTV helps us justify retention efforts and optimise spending. For Australian SMEs, accurately calculating this isn’t about complex formulas, but about understanding a few key metrics.
Let’s break down how we can work this out. There are several approaches, but a good starting point focuses on average purchase value, purchase frequency, customer lifespan, and profit margin. We’ll look at a simplified version, perfect for most small to medium businesses.
- Average Purchase Value: This is simply the average amount a customer spends each time they buy from you. Add up all revenue from a period, then divide by the number of purchases.
- Purchase Frequency: How often does a customer buy from you in a year? Again, total purchases in a period divided by the number of unique customers.
- Customer Lifespan: This is trickier. How long does a customer typically remain with your business? If you’re new, estimate based on industry benchmarks. For established businesses, analyse historical data – when do customers stop purchasing?
- Profit Margin: What percentage of each sale is profit? This is vital. LTV isn’t about revenue, it’s about *profit*.
Once we have these, the basic LTV calculation is: (Average Purchase Value x Purchase Frequency x Customer Lifespan) x Profit Margin. For example, if a customer spends $50 on average, buys four times a year, stays with you for five years, and your profit margin is 20%, their LTV is ($50 x 4 x 5) x 0.20 = $200.
It’s important to remember this is a simplification. More sophisticated models can incorporate churn rate and discount rates, but this provides a solid foundation. Regularly recalculating LTV – perhaps quarterly – allows us to track the impact of our retention strategies. If LTV is increasing, our efforts are working. If it’s declining, we need to analyse why and adjust our approach. Focusing on improving LTV should be a core objective for any Australian SME looking to build sustainable growth into 2026 and beyond.
The next step? Start gathering the data needed for these calculations. Your accounting software and CRM system are excellent places to begin. Understanding your LTV is the first step towards building a more profitable and resilient business.
