What Exactly Is Customer Lifetime Value and Why Should You Care?. This number might change the way you look at how much you are willing to invest to get each new customer, so as you can see, it’s an important number to follow. Once you understand the lifetime value of a customer, you can determine how much you’re willing to pay in new customer acquisition costs. For example, if a customer buys a $500 service once every year on average for ten years if you keep them happy you might determine you can invest more in landing and thrilling that customer. Who should care about Customer Lifetime Value For businesses that offer a customer multiple transactions over time, the concept of Customer Lifetime Value is pretty significant. Computer your average sale and gross margin of profit – we’ll call this number M (margin) Determine the average number of sales, transactions, renewals, etc you can expect over some period if you keep your customers happy – we’ll call this number R (repeat, renew) In simplest terms CLV = M X R I have a $2,000 product, and on average I make about $500 off of every transaction, and people buy on average 4.75 times over the course of the relationship – it could be said that my CLV = $2,375 or $500 X 4.75 Now, with that number in mind I can make some decisions: Am I investing enough if acquiring more customers? Could I find ways to get more referrals from these happy customers? It’s the number you can impact the easiest with your marketing efforts. To improve your company’s Customer Lifetime Value across the board, you need to take care of your customers and ensure that they are loyal to you. If it isn’t, then you know that you need to make adjustments in your lead nurturing endeavors.
In the marketing world, niche terms and metrics get thrown around frequently, and while there is some jargon that you can just shrug off, there are others that you should pay attention to, which brings me to the topic I’d like to discuss today: Customer Lifetime Value (CLV).
This is a metric that is often misunderstood and, even more often, overlooked completely. In a nutshell, Customer Lifetime Value is the calculation of what a customer might be worth to your business over the course of doing business with you, perhaps over the course of a few years as opposed to a single transaction.
This number might change the way you look at how much you are willing to invest to get each new customer, so as you can see, it’s an important number to follow. Once you understand the lifetime value of a customer, you can determine how much you’re willing to pay in new customer acquisition costs.
For example, if a customer buys a $500 service once every year on average for ten years if you keep them happy you might determine you can invest more in landing and thrilling that customer.
This change in point of view often leads business owners from viewing marketing as an expense to viewing it like the investment it can be. Of course, there are many factors that impact CLV over and above simply measuring it.
Who should care about Customer Lifetime Value
For businesses that offer a customer multiple transactions over time, the concept of Customer Lifetime Value is pretty significant. For businesses such as home builders, who might only work with a customer once in their lifetime, this concept might not seem to matter. Seem being the keyword in that sentence.
In my opinion, the lifetime value of every customer, including those who make a one-time purchase, is unlimited because of the potential for referrals they can make. A happy, single-transaction customer might be a source of business for years because they are likely to talk about your business and recommend you to others. It’s happened to me personally numerous times.
How to calculate Customer Lifetime Value
To get technical:
LTV = Revenue from each paying customer per month, multiplied by Gross Margin, divided by churn (Gross Margin is the amount left over after the cost of goods sold, churn is the percent of people who leave).
Let’s break that down a bit.
- Computer your average sale and gross margin of profit – we’ll call this number M (margin)
- Determine the average number of sales, transactions, renewals, etc you can expect over some period if you keep your customers happy – we’ll call this number R (repeat, renew)
In simplest terms CLV = M X R
I have a $2,000 product, and on average I make about $500 off of every transaction, and people buy on average 4.75 times over the course of…
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