In an age where customers have the ability to move freely from company to company, it becomes increasingly important to make sure clients stay loyal to your brand. In this article, we will be exploring the concept of customer lifetime value and its importance in maintaining a healthy business strategy.
What is Customer Lifetime Value?
The Customer Lifetime Value, or CLV, is a metric that is used to determine the profitability of a customer. In other words, it’s the total value of all goods and services that a customer purchases from a company during their lifetime.
CLV helps understand how much it will cost to acquire a new customer and how valuable that new customer will be in comparison to an existing one. This value changes as time goes on because it analyses how much profit that company can generate from one customer in various periods. It will also vary depending on the type of business and the type of customers it attracts.
A customer’s lifetime can be divided into many segments. For example their first purchase, an additional purchase after 30 days, and so on. These segments are then combined to get the lifetime value of a customer. The calculation is based on the assumption that customers will behave in the same way in the future.
How to calculate Customer Lifetime Value?
Customer Lifetime Value is a measure of how much money a company can expect to earn from an individual client in the long-term.
This concept has been introduced in 1990s by American economist Jim Lynch who wanted to find out how much it cost to acquire a new customer. He found that it cost six times more than the original purchase price for every new customer. CLV is the idea that the longer a customer stays with a company, the more valuable they are.
The lifetime value of a customer is the value of all the benefits a customer will derive from using your product or service throughout the course of their life with you. There are many factors that contribute to customer lifetime value, which is why it can be difficult to calculate. There are three key components that make up CLV:
- Customer Acquisition Cost (CAC): the cost of acquiring a customer, which includes marketing and sales costs.
- Customer Retention Cost (CRC): the total value lost in keeping an existing customer, in contrast to the amount needed to acquire a new one.
- Revenue per Customers (RPC): the average revenue generated from a customer over their lifetimes.
Focusing on these key components can help companies improve their sales process as well as increase profitability. In order to calculate whether a customer is worth your business or not, here’s a simple formula you can use:
CLV = Lifetime Customer Revenue - Lifetime Customer Costs
Customer Lifetime Value is a ratio that represents the return on investment for a company when it comes to acquiring customers. It basically tells us how well a company manages to turn their initial investment in customers into profits.
It’s important to note that CLV are estimates. They are derived using statistical models and assumptions about future behavior, which are not guaranteed to be accurate.
How can businesses maximize their Customer Lifetime Value ?
There are two ways in which a business can maximize their CLV—through customer acquisition or customer retention. The first way is to find new customers. The second way is to keep your existing customers for as long as possible. The more a customer stays with your company, the more money you make. It’s simple math – by retaining your customers and catering to them, you’re maximizing their lifetime value.
Businesses must be able to understand each and every customer’s perception on their brand. The more they know about their customers, the more they are able to increase their longevity. Businesses should also focus on creating an experience that is meaningful for them and their users; this is how to create lifelong customers.
In order to maximize the lifetime of a customer, businesses should:
- Provide great customer service with positive experiences.
- Increase retention through loyalty programs.
- Increase satisfaction with new products and services.
Optimizing your company’s lifespan involves making sure that it isn’t just surviving but thriving, too. It means that you focus on the long-term value of the company and what your company will become in the future, not just what it currently is.
Bottom line
Customer lifetime value is a tangible value that you can use to measure your marketing efforts. It is the total revenue a customer generates throughout their lifetime. With this information, you can make better decisions about your marketing strategy and tactics. The four ways in which you can use customer lifetime value for better insights into the industry are:
- Identifying what customers might be looking for.
- Identifying what customers will be loyal to.
- Understanding how much it would cost to acquire new customers.
- Identifying how many people are currently in your target market.
The future of marketing is upon us, and there is no doubt we will see an increasing amount of Artificial Intelligence in this field as technology advances. So would you invest in AI to calculate CLV in real-time for optimal marketing strategies?