Why Customer Lifetime Value Is So Critically Important

Customer lifetime value (CLV) is an important business metric. It is the total revenue your business earns from a customer over time. It gives you a picture of the business’s short-term, long-term status, and financial viability. It is also an indicator of product-market fit, client loyalty, and recurring revenue from existing customers.

CLV gives you an understanding of the costs and profits of your business as it relates to acquiring, generating revenues, and retaining customers. Also, getting repeat orders from existing customers brings in a healthy cash flow regularly into the business. When you know what a customer will spend with your business over time, you can consider more options for your acquisition budget. 

There are two basic ways of calculating CLV, depending on what data you have available.

1 Accumulated data

If you have historical sales data, this method is far more accurate. It puts together all orders by individual customers to get their own real CLVs. 

2 Average estimate

If you don’t have granular data, you can estimate an average by the following formula: Average order value times number of orders per year.

How to calculate Customer Lifetime Value

For instance, if your customer base will, on average, buy ten times per year at $10 per transaction (or $100 per year) for ten years, the lifetime value of a customer is $1,000 (minus costs). If your profit is 25% of sales, the CLV is $250 (25% of $1,000). Therefore, you could technically afford to spend $250 to attract a single new customer. However, many marketers suggest that you do not spend more than 33% of CLV or, in this example, would be $82.50.

Another view. If you could improve each of the three CLV numbers by 10%, you would increase profits by 33 percent, giving you a profit of about $332 (plus $82). This additional profit could then be added to your marketing budget to grow even faster the following year.

 Now, how can you improve each element of your CLV? 

Now that you know the lifetime value, you want to spend some serious time examining how you can improve your revenues and profits. This information will also give you a long-term look at your business and help you plan for the future. To improve your results, you should do the following things sequentially: 

1. Increase the dollar amount of each sale to a customer. 
2. increase the frequency that customers purchases from you. , 
3. Try to increase the number of products or services you provide for your customers.
4. Then, you can begin to increase your market share by going outside — to increase your market share by working on your competitor’s customers.

This process also forces you to look at different market and customer segments. For example:

1. Who are your best customers and worst customers using CLV? How can you get more of the good customers and maybe less of the lower value customers? 
2. Which products provide the most revenue and profits? Can you add value to your products and increase the price?  
3. Which industry or market segments provide the most or least CLV? Are you in the best markets, best niches, and aiming for the best clients?

You also want to generate many alternative ways to increase your CLV

Now, you can focus on developing many alternative ideas and practices to increase your CLV. You want to focus on your overall business strategy, potential innovations, and marketing strategy. More information is available on our ClickVisor program to help you accomplish these crucial tasks.  

Consider Multiple Marketing Approaches

This process also requires you to expand your marketing approaches based on the industries, segments, and types of customers. It is also a good idea to have more than one marketing approach that you continue to use long term. You need to try and test different approaches as the world, and people change. 

 CLV will change as you create and implement new programs

As you implement your marketing program, this lifetime value should change as the variables in the process change. So, reviewing your CLV regularly make sense. It will cause you to rethink many things you’re doing as you are always looking for ways to improve that number. 

Conclusion 

Client Lifetime Value is an essential concept for every business. It goes hand in hand with customer repeat orders and retention. It is also a great concept to broaden your thinking about your company and its mission. Plus, businesses with a high CLV can service their client better and grow continuously over time.