How to Determine Your Customers’ Lifetime Value
Customers are the most important aspect of your small business. Although you may experiment with different products or various marketing strategies, if you don’t have customers, these changes will certainly flop. Due to this, it’s important to anticipate customers coming and going, while also considering the ones that you retain.
Loyal customers should, paradoxically, be satisfied while wanting more. This means they’re fulfilled by your brand but want more of your product or service. Ultimately, these brand-insistent or brand loyal consumers will add value to your company throughout your relationship.
The customer lifetime value (CLV), or lifetime value (LTV), can be calculated to decipher the profit margin gleaned during the entire business relationship with the customer. This information is especially helpful regarding loyal customers.
To help you get started, the CleverTap team broke down how to determine the customer lifetime value. Keep reading to find out how your business can calculate each customer’s lifetime value, and in turn improve your overall operations..
What is Customer Lifetime Value?
The customer lifetime value approximates how much profit your company will make for the duration that the customer is your customer, or the customer’s “lifetime” with your business. This depends on the frequency at which your customer buys your products or services.
It’s important to include the expenses associated with the customer’s lifetime to more accurately estimate the CLV. These outlays include customer acquisition costs, in addition to sales, marketing operating and manufacturing expenses. Factor these into your profit margin before determining the CLV.
Ultimately, the customer lifetime value is used to project cash flow and figure out how many customers will yield your desired profitability.
How to Calculate Customer Lifetime Value
Now that you know what the customer lifetime value is, it’s time to learn how to calculate it. The customer lifetime value equation is lifetime value × profit margin, where the lifetime value equals the average value of sale × number of transactions × retention period.
It’s important to note that the CLV is a financial projection, meaning it’s based on educated assumptions. Therefore, the more data gathered on your customers, the more precise your customer lifetime value will be.
Solving for the CLV
For example, if the average sale for your business is $20, and your average consumer purchases from you three times a year for two years:
Lifetime Value (LTV) = $20 × 3 × 2 = $300
After adjusting your profit margin to reflect all expenses, you find your profit margin to be 30 percent:
Customer Lifetime Value (CLV) = $300 × 30% = $90
You’ll notice that the CLV is significantly less than the LTV. This is due to the cost of producing the product or service.
Let’s review that example again but change the variables to reflect a loyal customer. We’ll assume they still spend about $20 each purchase, but they buy your products or services six times a year for ten years:
Lifetime Value (LTV) = $20 × 6 × 10 = $1,200
Customer Lifetime Value (CLV) = $1,200 × 30% = $360
That’s a notable increase compared to the average customer! You can see why this calculation is particularly relevant when considering loyal customers — the customer lifetime value goes up with an increase in how often a purchase is made and the retention period.
Tips for Increasing Customer Lifetime Value
- Nail the first impression — Show your customers why they need your product or service. Convey your brand values, be attentive and dedicated to their needs, solve problems quickly, and relieve any hesitations or stress.
- Develop a personal relationship — Take the time to personally respond to your customers versus employing an automated system. Listen to their grievances and acknowledge their feedback. Nothing humanizes a company more than an open line of communication.
- Start a rewards program — Reward your customers’ loyalty by offering discounts and other incentives for repeat purchases. Whether it’s a point system or punch card, they’ll be coming back for more.
- Reach out to previous customers — Remind your customers that you’re there to improve their quality of life. Re-engagement at its worst reminds the customer of your brand, and at its best leads to a purchase. So, you have nothing to lose!
The customer lifetime value metric is important to businesses of all sizes. Executing tactics to improve your CLV will also serve to increase customer retention rates and decrease costs. Remember, retaining a customer is less expensive than acquiring a new one.
The next time you’re projecting your company’s growth and profitability, remember the customer lifetime value!
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