Valuing the customer lists
The purpose of a business is to build assets that generate income. One of the biggest assets that an internet business has the customer list. Here I teach you how to understand the value of your customer list.
There are 2 main methods I use to value customer lists namely:
- The cost replace method
- The long term value of the customer
The cost replacement method
With the cost replacement method, you determine how it takes to acquire each customer and then multiply the number by the number of customers.
For example, Let us say, I use pay per click to acquire new customers and I have to spend $30 to acquire one customer (with pay per click not everyone who clicks to your website becomes a customer, so the cost to acquire one customer is higher than one click). Using this method I have acquired 3,000 customers. With the cost replacement method, my customer list will be worth 3000 * 30 = $90,000.
As a side note, it is important to keep your customer lists fresh as lists are impaired over time. New customers are more likely to patronize than older ones.
Long term value of the customer method
The long term value of a customer is a prediction of net profits you hope to gain in the future as a result of the current relationship you have with that customer.
For instance Pat Flynn of Smart Passive Income has about 75,000 subscribers and probably has over 100,000 visitors per day.
Pat’s income from 2009 to 2013 are as follows (Numbers retrieved from the Smart Passive Income website):
Pat has a profit margin of 88 and 65% of Pat’s income comes from affiliate earnings. Assuming that on average Pat makes income on his main website (he also maintains a portfolio of other websites) as follows:
Affiliate earnings: Pat currently has 75,000 subscribers, supposing at one point each subscriber has clicked one of his affiliate links, Pat earns an average of 1,448,089.87/75000 = $19.31
Webinars, conferences and conferences: Occasionally, Pat puts on events with other internet entrepreneurs. One of his event with Chris Ducker was priced at about $500. However the revenue is split so he only gets half the income. Also, he does webinars and special trainings, since I do not know the specific prices of all these products when they are offered, I am assuming an average price of $200.
This excel spreadsheet is compliment of the Harvard Business School. The spreadsheet can be downloaded here
Note: These assumptions are very simplistic and with more thought the assumptions should will be more complex and probably be higher. However my goal is to illustrate a point and not go into all the complex calculations involved in deciding what really should go into the final lifetime value of a customer number. Over time the value of customers to your business might increase as you offer more products or services appealing to your customer.
If the lifetime value of one customer is $485.55 and Pat has 75,000 customers. His customer list is worth $36,416,250.
Note: I did not assign a value to time spent on building the business, however in a more complex model this should be done. Also, Pat spends very little on advertising. When compared to his gross income, his advertising expense is negligible.
This article is part 7 in the building financial freedom from your lifestyle business series