Profitable customers are the lifeblood of any business, and to increase their spending, you need to provide exceptional service and incentives to secure their loyalty. You can give them the world, but if your efforts outweigh the income they bring in, then you need to re-evaluate your efforts.
One of the ways that you can determine whether your efforts are profitable is by calculating the Customer Lifetime Value (CLV). Unlike other methods, like Net Promoter Score (NPS) that measures loyalty or CSAT that measures satisfaction, CLV is there to help ensure your acquisition and retention efforts are financially worthwhile.
How Do I Calculate Customer Lifetime Value?
To calculate CLV, you will need to be able to track the costs it takes to acquire and service existing customers in comparison to the value they bring in over their lifetime. The average purchase value can be estimated by calculating the purchase value over a person’s lifetime and then deducting acquisition and service costs over their lifetime.
How to Calculate Customer Lifetime Value
To calculate how much a customer is worth to your business, there are a few important metrics you need to track.
- Identify where the customer creates value (subscription, product purchase, service hire, etc.).
- Record the customer journey
- Determine and measure the revenue earned at each touchpoint
- Extrapolate over their lifetime.
Customer Lifetime Value (CLV) Definition
Customer Lifetime Value (CLV) refers to the financial value a customer has to your business. It differs from other calculations that work out customer retention and customer support success, as it helps you to maintain a profitable stance throughout your business.
Customer Lifetime Value 101
Customer Lifetime Value is great for ensuring acquisition costs do not outweigh the value a customer brings to your business over a large time period. You can unknowingly be paying more to retain a customer than they are paying you, and thus putting your business in a deficit.
What is the importance of Customer Lifetime Value?
Customer feedback can help you to understand and improve retention rates, but if the money you are spending in your effort to grow loyalty is more than you are being paid, then your business is not sustainable. This does not mean that you abandon your retention efforts, but instead, you need to find new, more affordable methods for the sake of your business.
What is the meaning of customer lifetime value?
A customer perceives value in a variety of ways, which means you have multiple options to maintain lifetime loyalty. You cannot provide this if you are consistently going into debt in the effort. Customer lifetime value is how much financial value a customer provides to a business and is key to staying profitable.
How to calculate the lifetime value of a customer?
Calculating the lifetime value of a customer is easier than obtaining feedback for customer service. You simply calculate the costs to acquire a new customer and to provide great service to that customer throughout their lifespan. Take their average payments and extrapolate over the same period, and you will have their CLV.
This can be done for an individual and your entire customer base.
What is a good customer lifetime value?
Good customer lifetime value is profitable. If it costs more to offer the service or product, acquire and retain a customer, then you will go out of business. A profitable CLV is key to ensuring your company is on the right track to grow and expand.
What is customer value?
A customer’s value is the profit they can bring to your business. Spending to acquire new customers is not cost-effective, but unless you calculate customer value, you can similarly spend too much on retention strategies and service and still go slowly into debt.
Simple CLV Formula
To calculate the lifetime value of a customer, you simply need to use this formula:
Customer revenue (minus) cost of acquiring and serving the customer (equals) Customer Value.
You will need to extrapolate this formula in order to estimate the value of a customer over time. After all, it might cost more initially and then smooth out over time. Subscriptions, for example, mean that customers have a negative CLV in the first year and then provide profit to a business afterward. For instance, Netflix has borrowed huge amounts to create original movies and series that encourage customers to stay loyal throughout their lifespan. As customers retain their subscription year after year, however, the costs are more favorably spread across, and the business is profitable.
This formula is not only geared towards subscriptions. You can customize it as necessary in order to work out a profitable business model that provides great service to customers with an end goal of profit.
- Multiple purchases
- Behavior patterns
What is Customer Lifetime Value and Why You Should Care
Customer lifetime value (CLV) is one of the most important metrics to know in any business. It goes beyond estimating customer revenue and helps businesses calculate the profit to be earned throughout a customer’s lifetime and whether or not strategies need to change or prices need to be increased.
You need to care because no business can survive for long when making a consistent loss. Yes, you can benefit from acquisition methods that translate into profitable relationships over time. Offer an introductory deal to new subscribers that ends after a month or year to get them to try out their service. You can expect to make a negative CLV during this brief time with the expectation that they will bring in a profit after the trial period.
On the other hand, you might just be spending too much on services and loyalty programs and need to rethink your strategy. Maintaining customer loyalty is important, yes, but staying profitable is how you expand and succeed as a business.
You can offer great service at any budget, so long as you monitor feedback for new strategies and work out a healthy compromise so that your customers provide value to your business throughout their lifetime.