In our recent article series on big data and small data we have looked at what constitutes data and how information can be gathered. Data about your customers is critical to understanding their habits and their needs. One term related to this topic is Customer Lifetime Value. Understanding this concept and knowing how to apply it to your business can be extremely profitable. It’s a bit different from break even so let’s take a closer look.
What is Customer Lifetime Value?
Our friends at Wikipedia offer this somewhat lengthy definition:
In marketing, customer lifetime value (CLV) (or often CLTV), lifetime customer value (LCV), or user lifetime value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques. Customer lifetime value (CLV) can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.
Why should I care about CLV?
CLV gives you a different perspective on your business. Where break even gets you focused on short-term bottom line performance, CLV shifts that focus to long-term relationships. Understanding a customer’s repeat spending potential will help determine how you allocate your resources in terms of customer retention and services. Regardless of your industry or level of customer interaction, every business will benefit from understanding their CLV. Using this data as the basis for marketing and sales decisions means those decisions are based on the reality of your own numbers. Calculating CLV is a powerful business tool that can boost both profitability and customer retention rates.
How do I calculate CLV?
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
An easy example would be the lifetime value of a gym member who spends $20 every month for 3 years. The value of that customer would be:
$20 X 12 months X 3 years = $720 in total revenue (or $240 per year)
The numbers you establish will guide you in determining how much to spend on a per customer basis. It’s also a good time to look at each stage of your customer buying experience to determine where your money is best spent. For example, you may choose to spend more at the front of the customer life cycle in the acquisition of new customers. Or perhaps your money is better spent later in the cycle at conversion or retention.
Have you mastered CLV in your business? We’d love to hear how you did it. Post a comment below.