Your customer lifetime value or CLV is arguably the most important metric to work out for any growing business. Shockingly though, most companies ignore it.
What is it?
It’s based on the average revenue you would predict to receive from a customer over the lifetime of their relationship with your company. You want to keep repeat customers. Not only are new customers more costly to acquire but building on your CLV will help increase the health and profitability of your company.
Why is it important?
As mentioned earlier, you’ll be saving money by nurturing existing customers and giving them special attention. 20% of your customers generate 80% of your average revenue after all.
Let’s do an example. If it costs your company £5 to acquire a new customer, and they end up having a lifetime value of £800 then that's amazing but if you have 80 customers that only spend £10 (also £800) each then that will reduce your profitability significantly as you will be paying out £5 for each of those 80 people.
You don't want to be spending more money on trying to get customers than they’ll give you back into the future.
But how is it calculated?
Here’s the answer in 5 easy steps:
1 — Average purchase value.
This is your total revenue for a specific time period, we recommend a that you use around one to three years, divided by the amount of purchases in that same period.
2 — Average purchase frequency.
This is your amount of purchases within the time frame divided by the amount of unique customers.
3 — Customer value
All we do here is multiply your average purchase value by your average purchase frequency.
4 — Average customer lifespan
For this you will have to average out the typical number of years your customers continue to purchase from you.
5 — Customer lifetime value
Finally! You work out your CLV by multiplying your customer value by your average customer lifespan.
So now that we know how to calculate our CLV how can we improve it?
The most useful answers are actually the most straightforward…
By working out your CLV you’ll gain better understanding of your customer personas and see themes in the customers generating the most lifetime value. So even when you are finding new customers, you’ll know exactly who you’re looking for. You’ll be able to narrow your focus on those who would be most beneficial to you and who you now know is more likely to have a higher CLV.
And lastly, keep your customers happy!
Sounds obvious right? But there is nothing that will keep customers coming back more than keeping them wanting more, and therefore, increasing their lifetime value. Listen to your customer reviews, be there when they need you and most importantly: help solve their problems.