Customer Lifetime Value (CLV) is a prediction of the value each customer can bring to your business, considering the customer's purchasing behaviour, the length of the customer relationship, and the costs associated with acquiring and servicing the customer.
One of the key reasons for measuring CLV is to understand the value of customer retention, as selling to repeat customers should be more profitable than acquiring new ones.
CLV helps you understand how much you should spend to acquire new customers and retain or encourage customers back.
Calculating CLV involves determining the customer's purchase history, the length of the customer relationship, and the customer's gross margin.
The real value of one customer spending $100 at a time
Assume you spend $200 for new customers, then $20 to get them to come back each time (averaged over all your activities). Each customer spends $100, 10x/year and stays as a customer for 5 years. Your gross margin is 50%.
The lifetime value of that customer is $2,200.
When they come into your business, treat them as a $2,200 profit sale, not a $100 sale.
The obvious benefit is the on-going (almost) guaranteed revenue from a customer returning and the (should be) lower cost to keep them happy. Returning customers often pay more, accept price increases, and have fewer complaints.
The referral bump
It’s common knowledge one happy customer will tell multiple people about the great experience you’ve provided, spreading the word to potential new customers you don’t need to spend advertising money on attracting.
In today’s environment loyalty can change quickly where consumers can spread good news (or bad) almost immediately via social media. If you want customers to refer, have a plan in place and a budget, such as allocating staff time, personal follow-up calls, thank you emails, social media coverage, case studies, prior notice of sales or a formal reward system to encourage positive word of mouth.
Use our CLV template to calculate the value each of your customers bring.
