In this article, we are going to go over what Customer Lifetime Value is, how to calculate it, and how it can help your business decisions in the long run.
Understanding consumer trends is just a couple of equations away from projecting your businesses future goals and deadlines, so let’s get started!
Understanding Customer Lifetime Value
Customer Lifetime Value is a way to measure and evaluate your customers in any business scenario. Understanding your CLV can aid you through critical business decisions and projections in all areas of your niche. Predicting your CLV will help overall choices within the following areas:
- Product development
- Customer support
We’ll dive further into how understanding CLV can aid your business in these areas, but first, let’s do some calculations so that you feel confident about estimating your CLV.
How to Calculate Customer Lifetime Value
There are various details to consider when appraising CLV, so try to base your game plan around distinct questions that result in viable answers which will help your business grow. We understand that every business is complex, but the simplest way to calculate CLV is with an equation.
Before we get started, ask yourself how much one customer is worth to you. We understand that customers are valuable, they can become people that you love to be around and that you can’t put a price on. But we are speaking in monetary terms, so let’s get to crunching some numbers!
This is the very basic equation for CLV:
(Revenue earned from 1 customer) – (spending costs on lead and service for 1 customer) = CLV
By using this equation as a guideline, you can calculate an estimated CLV. A full and comprehensive calculation of your customer lifetime value can take some time. Let’s explore an example together.
How to Estimate your Customer Lifetime Value
The best way to estimate your customer lifetime value is to figure out the cost in USD of a typical purchase. For example, let’s say that on average someone walks into your store and spends $100.
After that one customer makes their first purchase, you can assume a 10% chance that they will come back to your store for a repeat purchase. This percentage is based on industry averages. However, if you would like to know your specific repeat purchase rate. You can calculate it with this easy equation:
- Repeat rate = (number of customers that have shopped more than one time) / (number of total customers)
- 100 / 10 = 10% repeat purchase rate
So if you have 100 customers, and only 10 of your customers make repeat purchases, your repeat purchase rate is 10%.
Next, let’s presume that it costs you, as a business owner, 20 dollars to get that one customer in your doors.
Now let’s get to the final equation!
- 100 / .9 = 111.11 – 20 = CLV 91.11
If you were to break this equation down, you are estimating your customer lifetime value like this: (Average order = ($100)) / (divided by 1 and subtracted by the rate of repeat purchase (1 – 0.1)) = ($111.11) – (minus your customer onboarding costs ($20)) = YOUR CLV (91.11).
By calculating your repeat purchase rate, and then your customer lifetime value, you will be able to focus on the customers that use you the most.
Then you will be able to cater to a better audience and target those consumers specifically. You will be able to recognize their spending patterns by knowing how often and when they purchase items from your store. The key here is to keep a good data record on hand.
How to Predict your Customer Lifetime Value
The best way to predict your customer lifetime value is to use historical data to your advantage. Track your CLV over periods of time. You can also look up data and charts based on the CLV of other companies in your industry.
This way you and your employees will be able to gather consumer patterns and trends. You will be ready and prepared to combat market spikes and falls.
Calculating your CLV will allow you to pinpoint the busiest times of the week, month, and year so that you will be well prepared and stocked up.
It also allows you to combat slow periods. If your marketing and sales team understands that you are in a slow period of the year they can take the methods necessary to bring customers through your doors – like coupons, sales, and special deals.
If you can track your CLV using charts and historical data, you will begin to understand how much a customer is worth to you, and how their value changes over time.
Finally by tracking consumer behavior and spending you can improve your CLV, by predicting customer behavior during certain times, seasons, and days of the week. Then your marketing team can target certain consumers during these times.
How Calculating Customer Lifetime Value Improves your Business Overall
Get in touch with your customers in all areas of your business by understanding your customer lifetime value.
By predicting your CLV, your sales team will now understand what type of customers are most valuable to bring on board.
Your marketing team will understand how much money they should spend on the marketing budget to acquire a customer.
Your product development team will be able to offer the best products tailored to the customers that bring the most value into your company.
And finally, your customer support team will understand how much time they should spend on retaining specific customers.
So, Do you Know your Customers Lifetime Value?
If you don’t, it would be a great idea to start crunching those numbers. Understanding your customer lifetime value will improve all areas of your business. So remember to keep the customer in mind, gather historical data, and check out the current market trends to enhance your revenue and keep your company rolling.
President, Direction Inc.