In a previous post I explained how to calculate the gross revenue generated by one customer over its lifetime.
In order to calculate the Customer Lifetime Value we need to subtract the direct costs incurred in order to acquire and serve that customer.
Let’s continue with the example of an eCommerce site that sells shoes.
How to compute the costs to acquire and serve a new customer?
In the list of costs you need to include any costs that are incurred to get a new customer or to serve an order. You should compute the variable costs, those that increase with every new customer you acquire and serve and hence can be directly attributed to the customer.
The key to build a profitable business is as simple as making sure that the revenues generated every month are higher than the costs incurred to generate that revenue.
In eCommerce companies the analysis is usually done on a customer basis: the revenue generated by one customer over its lifetime must be higher than the costs incurred to acquire the customer and to deliver the product or service to that customer. This is usually called Customer Lifetime Value or CLV and it is a measure of the gross profit you expect to generate from each customer.