Do you know how much customers are worth to your business? The truth is most businesses don’t and yet customer lifetime value (CLV) is one of the most important metrics for a growing company as it provides an indication of how well they are doing. In essence, the CLV is the projected revenue or net profit that a customer will generate during the course of their relationship with you. Calculating the CLV for your business will help you to assess gross profit and success over time. So, how do you work out the CLV? Let’s take you through the steps.
- Calculate the average purchase value. The first step is to work out the average purchase value and the way to do this is to divide your company’s total revenue over a year by the number of purchases over the course of the same time period.
- Calculate the average purchase frequency. The next step is to calculate the average purchase frequency by dividing the number of purchases over the course of a year by the number of unique customers who made purchases over the same period.
- Calculate customer value. To arrive at this number multiply the average purchase value by the average purchase frequency.
- Calculate the CLV by multiplying customer value by the average customer lifespan. This calculation provides an estimate of how much revenue you can reasonably expect the average customer to generate for your company over the course of their relationship with you.
Why CLV Is So Important
Having an understanding of CLV in your business is important as it sets a benchmark against which you can assess future growth and expansion. Over time you’ll be able to determine how well you are doing especially when CLV is considered alongside other essential business metrics such as sales, revenue and profit margin. It will also be of interest to potential funders of your company as it helps to determine the worth of your business.
In addition, CLV provides a clear demonstration of the significance of repeat business. It’s all well and good focusing on acquiring new clients all the time, but as CLV shows getting current customers to purchase more from you is often more important and valuable in the long run. What’s more, these longstanding customers tend to require lower costs and usually produce higher customer satisfaction ratings. And so, an understanding of CLV will help you prioritise your customer acquisition and client retention programmes as well as ongoing marketing, social media and customer relationship management.
CLV: Key To Future Profitability
If you haven’t yet determined the CLV for your business then the time to do so is now. Along with measuring sales and revenue, CLV should be an essential component of any company’s financial metrics, otherwise how will you know how profitable your business really is?
Use the steps outlined in this article to start tracking progress in relation to CLV for your business.