Customer Lifetime Value
You've grown your customer base, sales keep on growing, and you even implemented some customer retention strategies. Find out how your customer retention is truly affecting your business.
Key Takeaways
Customer lifetime value (CLV) refers to the expected revenue per customer might generate for your business.
From a financial standpoint, do you know how much impact each customer has on your revenue? If not, you might need to look into your customer lifetime value.
What is customer lifetime value?
Customer lifetime value (CLV) refers to the expected revenue per customer might generate for your business. This can be calculated on a general basis or customer specific basis. This metric takes into account average purchase values, frequency of purchases, and more. The goal of this metric is to calculate the value of a customer will have across the entire lifetime with the business.
Why customer lifetime value is important.
Knowing your customers lifetime value can provide valuable insights into many aspects of your business. For example, you can compare your CLV to your customer acquisition costs:
How long it takes your business to break even on a new customer?
Does it happen with the first purchase or the fifth?
You can also calculate the CLV for different kinds of customers and allocate customer attention resources accordingly. For example, Let's say that you offer a subscription service with both yearly and monthly plans:
Which customers has the highest CLV?
The ones buying the monthly plan or the ones buying the yearly plan.
In general terms, customer lifetime values, will allow you to see the numbers behind your customer strategies, and provide insights on how to plan your strategies moving forward.
How to calculate our customers lifetime value.
Before we get started, you'll have to set two parameters (which set of customers will you use for your calculation):
Will you calculate CLV for all customers or a specific subset?
Which timeframe will you use to calculate CLV? Monthly, quarterly or yearly basis depends mostly on your own business cycles and what works best for your business
The numbers you'll need for your CLV calculation.
First, you'll need your average purchase value (APV). You can calculate this by taking the total revenue generated (TRG) by all customers in your set and divide it by the numbers of purchases or transactions.
APV = (TRG) x (Customers in the set) / (# of Purchases)
Second, you'll need your average purchase rate (APR). Calculate this by taking the number of purchases or transactions in your lifetime and divided by the total number of unique customers in your set.
APR = (# of purchases) / (unique customers in the set)
Next, calculate the average customer lifespan. Calculate this by taking the average number of months quarters years that your customers stay active and purchasing from your business.
ACL = (Average number of months or years)
Lastly, you'll need the customer value (CV). Calculate this by multiplying the average purchase value by the average purchase rate, both of which you calculated earlier.
CV = (APV) x (APR)
Calculate the customer lifetime value.
Multiply the customer value (CV) by the average customer lifespan (AVL). The number will give you the average total revenue (ATR) you can expect from each customer you acquire. It's important to note that your customer lifetime value is not a static metric.
ATR = (CV) x (ACL)
Your customer lifetime value will change as you implement customer retention strategies and new product offerings.
It is recommended that you recalculate your customer lifetime value every so often.