Is Customer Lifetime Value Critical or Tangential to Your Business?
Customer lifetime value (CLV) is an important metric, but it can be hard to understand. CLV refers to the total value of a customer over their lifespan as a consumer. In other words, it’s a measure of how much revenue you’ll make from a client over time based on their purchase history, intentions, and trends. But how do you use this information? What’s the point in calculating customer lifetime value? And more importantly, what does it mean for your business? In this article, we will seek to answer these questions
What is customer lifetime value?
Customer lifetime value is the net present value of all future cash flows from an average customer. In other words, it’s a measure of the profit generated by a customer. It’s calculated by multiplying the average profit per sale by the number of purchases made by an average customer.
How to calculate customer lifetime value
To calculate your customer lifetime value, you first need to determine how much an average customer is worth to your business. For example, if a customer spends $50 per month on something you sell, they’re likely worth $600 over 12 months.
To figure out how many customers you need to acquire and keep a year, multiply the number of people who buy from you by their lifetime value. So if your business sells products that cost $50 each:
- 20 customers x 50 dollars each = 1000 dollars in revenue
- 20 customers x 50 dollars each x 12 months = 6000 total dollars of sales per year
Why is customer lifetime value important?
Customer lifetime value is a measurement used to determine the total profit you can expect to make from a single customer throughout their relationship with your company. It helps you understand how much you can spend on acquiring new customers, as well as whether or not it’s worth keeping loyal customers for as long as possible.
If your CLV is higher than your customer acquisition cost (CAC), then it’s easy to see why CLV is important. If a single consumer will generate more revenue than it costs to acquire them, they’re worth keeping around. If they don’t generate enough money to cover the cost of acquiring them in the first place, though—or if the CAC far exceeds any potential profits—then cutting ties may be necessary for your business’s survival.
How to get the most out of calculating customer lifetime value
Customer lifetime value is a useful metric, but it’s not the only one you should be using to measure your business. Comparing customer lifetime value to other metrics can help you make sure that the information you are getting is accurate. In addition, using this metric as a guide for future decisions in your business can help prevent costly mistakes. Lastly, if used correctly, customer lifetime value allows companies to predict future revenue and use that information as part of their overall marketing strategy.
Customer lifetime value is not a one-size-fits-all formula. It’s important to note that there are many ways to calculate CLV, and it all depends on what you want to know about your customers. Some companies use CLV to make marketing decisions about how much money they should spend on acquiring new customers or retaining existing ones. Other businesses use CLV to measure the lifetime value of their goods and services or even their entire business. When calculating customer lifetime value, businesses need to keep in mind that not every customer will stay loyal forever—or even long enough for them to matter from an accounting standpoint—so don’t get too hung up on this number alone.