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The Lifetime Value of a Customer

(updated 2021)

Many American women begin wearing makeup daily, once they enter the workforce. The amount of make-up worn varies from a simple lip gloss to full makeup (e.g., foundation, mascara, blush, lip liner, lipstick, eye shadow, nail polish, etc.). For women entering into a professional or corporate arena, the likelihood of wearing full makeup increases.

Thanks to Max Factor and Elizabeth Arden, makeup has been ingrained in the western social fabric as an essential part of a woman’s routine. This expectation is enforced by friends, family, female role models, and advertisements. Because grooming is an inextricable part of human socialization, there exists a very profitable market for these very essential cosmetics.

Calculating the lifetime value of a singular customer, illustrates how one singular customer is potentially worth hundreds of millions of dollars.
via @finandmrkt (https://bit.ly/LTValues)

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The Rise of M·A·C
MAC, an acronym for Makeup Artist Cosmetics, began in the entertainment industry and was made available to the public in 1995. It emerged as the third upscale makeup line that catered to women of color, after Fashion Fair and Iman; and the first to embrace the entire spectrum of skin colors. MAC offers its customers a portfolio of looks, gifts, and how-tos for weddings and special occasions. Their products can only be found in their own specialty shops or high-end departments stores such as Nordstrom and Macy’s where personnel provide one-on-one attention. Despite their industry clout, the products are competitively priced, making it unnecessary to compromise style for cost. All of these factors have made MAC especially attractive to women, and one of the top selling brands. 

MAC continues to honor its roots with a Pro Membership program that connects artists with a worldwide community that shares a passion for makeup artistry. This program is available to those who use makeup as a primary part of their work, as well as industry professionals who work directly with artists. It’s endorsed by professional makeup artists everywhere, as well as “fashionable” entertainers, such as Taraji P. Henson, Ariana Grande, and Lady Gaga.

Calculating One Customer’s Value
A woman will use makeup for approximately 40 years of her life. We can assume a brand loyalty of eight years for the industry. At one time I would have assumed 10 years, as historically, new brands were not introduced often; however, in recent history, new brands have been introduced more frequently. For the sake of making the calculations simple, we’ll assume the following:
  • Continuous referrals from each new customer.
  • Referral from any one individual limited to an eight year period.
  • An average Return on Sales of 12.17%; based on parent company financials (Estee Lauder 12/2019 pre-crisis).1
  • One annual purchase; although some many customers will obviously purchase more frequently.
  • Purchase price of ~$279.00, based on a study of the average expenditure at Sephora and Ulta.2 The calculation considers that cosmetics is lumped into a general category of beauty products, which includes lotions, cleansers, masks, scrubs, etc., and that these venues are not likely the primary source of other beauty products: (((($33.17 Sephora + $28.78 Ulta)/2)*12 months)*0.75 makeup's share of beauty purchase =$279). 

    Year # Cutomers
    Referrals # Customers
    1 1 5 6
    2 6 30 36
    3 36 180 216
    4 216 1,080 1,296
    5 1,296 6,480 7,776
    6 7,776 38,880 46,656
    7 46,656 233,280 279,936
    8 279,936 1,399,680 1,679,616

    Metric Equation Result
    Annual Individual Value (1year * $279 annual expenditure) $279
    Lifetime Individual Value (8 years * $279 annual expenditure) $2,232
    Lifetime Network Value (Lifetime Individual Value * Network of 1.7 million) $3,748,902,912
    Profit Generated (Lifetime Network Value * 12.17% Return on Sales) $456,241,484

Calculating the lifetime value of a singular customer, illustrates how one singular customer is potentially worth hundreds of millions of dollars. 

Focusing on the lifetime value of a customer converts them from a transaction into a potential relationship; and quantifying the value can serve as a great rallying point for employees. Anyone who has ever visited a MAC store knows they do a fairly good job of creating a physical environment conducive for relationship building. To personalize your visit, they ensure that there is an exchange of names, and they assign a singular associate to you, for the duration of the visit. When customer service representatives are stable, consistent, and focused on meeting the customer’s needs it reduces the likelihood of customer-employee friction. MAC is a good example of successful execution. They make the effort to provide service beyond a simple purchase of cosmetics, ensuring satisfaction and building customer loyalty, maybe for a lifetime.

The Implicit Value
Acquiring new customers is important; but, maintaining current loyal customers is arguably even more important. Moreover, it costs less to market to and to maintain loyal customers, than it costs to acquire new customers. With current customers, you've already paid the acquisition costs; and happy customers are reluctant to change vendors not just because they're satisfied, but they also avoid switching costs.3 4 According to consultants Bain & Company, current customers are also more profitable.5 A 5% increase in retention increases profits by at least 25%. Additionally, over the relationship lifetime, loyal customers contribute up to ten times more to the bottom line than irregular customers.                             

3 Investopedia: Acquisition Costs
4 Investopedia: Switching Costs

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