When you’re running a business, it’s helpful to know what your customers are worth. The concept of customer lifetime value (CLV) is an estimate of how much money a single customer will spend throughout their relationship with your company. In this article, we’ll tell you why knowing CLV is so important and how to calculate it for yourself.
Also Read – How to Convert More Buyers by Providing Customer Financing?
Why customer lifetime value matters
Customer lifetime value is a key metric for measuring customer value. As the name implies, it’s the total value of a customer’s purchases over their lifetime with your brand. It also accounts for any revenue you may receive from referrals or word-of-mouth marketing.
While there are many different ways to calculate CLV, one of the most common ways is to take an average of how much each customer has spent in total and divide that number by the number of months they’ve been a customer. This will give you an idea if they’re worth more than others because they spend more money or because they stick around longer (and thus spend more).
What’s included in customer lifetime value?
Customer lifetime value (CLV) is the revenue that a customer generates for your business, minus the costs involved in acquiring and servicing that customer. It includes both direct revenue from purchases as well as indirect revenue from referrals or other sources of revenue.
There are two main components to CLV: the average contribution margin per sale and the average retention rate. The contribution margin is defined as sales minus variable costs, while retention rate refers to the percentage of customers who come back after making their first purchase (or close). The sum of these two gives you an indicator of how much profit each new customer could bring in over time if they’re retained as a repeat buyer.
How to calculate the customer lifetime value
You can calculate your customer lifetime value in one of three ways:
- Calculate the average revenue per customer over a specific period. For example, you can divide the total revenue for that period by the number of new customers acquired during that period.
- Calculate an average annual spend divided by a retention rate for each segment or product to determine its lifetime value by segment. This method is most useful when you have multiple products or services, as well as different types of customers (e.g., small businesses versus individuals).
- Use web analytics tools like Google Analytics to create a model based on user behavior and interests to determine what someone is worth if they become loyal users. For instance, if a customer typically makes purchases every two months and make purchases over $10 each time, then you know this person will be valuable because they’re spending more per visit than other users—and thus are likely buying more often.
Can customer lifetime value help attract more customers?
Customer lifetime value is an important metric for attracting new customers. A company that attracts the right kind of customer will be able to retain them for a long time and build loyalty. If you’re thinking about investing in customer acquisition, it’s important to know how much your average customer brings in during their lifetime.
This is why you see companies spending millions on marketing every year—they want as many people as possible to hear about their product or service so they can increase the number of people who buy from them (or recommend them). The key here isn’t necessarily getting more traffic but getting more high-quality traffic. After all, people who are likely to buy something from you now are more likely to later as well.
Conclusion
Remember, customer lifetime value is even more important than short-term sales. It also helps you track the long-term benefits of your business. That way, you’ll know exactly which customers are worth keeping around—and which ones aren’t. You’ll be able to use this information when deciding whether or not to invest in advertising or marketing campaigns that target specific groups of people who seem like they might be good fits for what your company offers.