The Big Question Every Company Asks Themselves: How Much Profit Are We Making Off Each Customer?
This answer is so important because it determines the fate of the business currently, as well as what profits need to be made in order to allow the company to expand in the future. That is why the Customer Lifetime Value (CLV) is the single most important metric in making financial business decisions regarding Marketing, Sales, Product Development, and Customer Support. As we go more into depth on these topics, you will be able to answer these following questions on each of these areas the business standpoint.
- Marketing: How much should I spend to acquire a customer?
- Sales: What types of customers should sales reps spend the most time on trying to acquire?
- Customer Support: How much should I spend to service and retain a customer?
- Product: How can I offer products and services that best suit my customers?
The easiest way to calculate the Customer Lifetime Value is by taking the revenue you make on a customer and subtract the money spent on acquiring and serving that same client.
How Do You Calculate & Estimate Your Customer Lifetime Value?
Here’s a great customer lifetime value calculation example: a customer makes an initial purchase with you for $100, and they are 10% more likely to make future purchases with your company. The customer acquisition cost (CAC) was $20 to get this customer. The formula for this scenario would be $100/ (1-.01) = $111.11. Then, subtracting your customer acquisition cost from that, you get a customer lifetime value of $91.11.
How Do You Predict Your Customer Lifetime Value?
The Customer Lifetime Value is the best way to understand what a customer is worth to you now, and also by determining how their value will change overtime.
In averaging the most basic form of CLV, graph a chart that includes:
- Single Input
- Sum of All Purchases
- Closed Time Parameters, for example in a 365-day time frame of your business margins (the longer the time frame, the more accurate the result)
This chart will then show you how your business is currently averaging over a one-year period. This will then give you a basis of how to predict what can happen in the years to come to keep these numbers consistent, or by improving on certain areas. This method is a good indicator of predicting future customer behaviors.
How To Improve Your Customer Lifetime Value?
Improve Purchase Rate Results
To improve your customer lifetime value, you will want to chart your:
- Cumulative CLV Totals
- Current CLV Estimate Totals
- At a 10%, 20% and 30% Repeat Purchase Rate (RPR), Over a 5 Year Period
This will give you the Improve Customer Purchase Rate results.
Improve Average Order Value
Using this same chart format as above:
- Average Your CLV Totals
- Current Customer Average Order Value (AOV) in Dollar Amounts
- At a 10% AOV, 20% AOV and 30% AOV Margin, Throughout a 5 Year Period
This will show you the results of where your business stands currently and where to make adjustments to improve these results.
What Should Your Customer Lifetime Value Be?
Only your data can accurately answer this question. If you need help with insight on how your calculations measure up to your existing data, there are tools out there like Stitch, for online businesses to calculate these totals and build on their existing data.
Or you can reach out to us, Tag Marketing at 773-680-6952. Our specialist will guide you in the right direction in making these data consolidations and make it easy for you to continue growing your business to its fullest potential. We are located in Chicago, Roselle, Bartlett, Brookfield, Carol Stream, & Geneva Illinois so you’re never too far away for an in-person meeting with the marketing team that wants to grow with you.
If you enjoyed this blog article on Customer Lifetime Value calculations, examples, and how to improve results; please download our {cheat sheet} below to learn more important metrics that will skyrocket your business to the professional level. Also, checkout some other related topics such as the 6 Most Important Marketing Metrics For CEOs and the 12 Digital Marketing Metric Your Boss Doesn’t Want To Hear.
