Today, I’ll discuss how to determine lifetime value of a customer. How do you measure the success of your business? Do you solely focus on factors like sales and revenue? Sales and revenue are excellent metrics, but for tracking the short-term performance of campaigns and content.
Customer Lifetime Value (CLV) is the most critical factor for determining the present and future success of your business. CLV is an underrated and often overlooked metric.
But, it can accurately predict the worth of your customers. It offers business owners invaluable insight into how much money they should spend on acquiring customers. Keep reading to know how to determine lifetime value of a customer.
How to Determine Lifetime Value of a Customer? Here’s How
Breaking down the calculation into digestible chunks is recommended. It becomes much easier to determine the CLV. Start with the variables and move onto the individual components.
What variables do you need?
- Average Order Value: This represents the average money spent by a customer. Calculate your overall revenue and divide it by your total orders to get this number. Basically, Average Order Value = Total Sales/Total Order Count.
- Purchase Frequency: This refers to the average number of orders placed by a customer. To find the number, divide total orders with a total number of consumers. Total Orders/Total Customers will give you Purchase Frequency.
- Customer Value: The average monetary value that a customer brings to your business refers to Customer Value. Multiply Average Order Value by Purchase Frequency to calculate Customer Value. So, Customer Value = Average Order Value * Purchase Frequency.
Now that you have all the variables, it is time to actually calculate the CLV. Also, note some of the problems that you might face.
Calculating CLV is extremely simple, once you have fulfilled the above-mentioned requirement. All you have to do is multiply Customer Value by the average lifespan of your customer.
Customer Lifetime Value = Customer Value * Average Customer Lifespan
Average customer lifespan refers to the length of time that your relationship lasts with your customer. This basically represents the timeframe till when the customer becomes inactive or permanently stops making purchases.
However, determining customer lifespan is a bit tricky. Remember that when it comes to customer lifespan, the non-contractual or contractual business makes a difference.
For instance, if online stores are considered, they mostly fall under the non-contractual category. This means that once a purchase has been made, the transaction is considered over. Therefore, it is difficult to identify when an active consumer becomes inactive.
However, there are also certain online stores that belong to the contractual category like, subscription-based businesses. It is easier to know when a customer is becoming inactive in a contractual business.
Customers usually informed before ending their subscription or contract. So, there is no hassle in determining the average lifespan of the customer. Another roadblock that you might experience is not having enough customer data.
New brands or stores typically face this issue. So, if your business is new, you will have difficulty in calculating the average customer lifespan. However, don’t worry. There is a fix.
As a rough estimate, you can consider a lifespan of an average of 3 years. This timeframe has proved to work brilliantly for most businesses that are new.
An average of 3 years is a good time to gather an idea about how customers perform. You can also gather knowledge about how they will potentially perform in the future.
How can you boost your Customer Lifetime Value?
This is the next plausible step after calculating the CLV. Even though the results might excite you, there will always be room for improvements. So, take a look at ways to creating new opportunities to enhance their value.
- Encourage to spend more: Encouraging your customers to spend more is an integral part of enhancing CLV. This will also increase your average order value. Product comparisons, the inclusion of social channels within the e-commerce store, free shipping or discounts are some ideas for you to consider.
- Improve engagement: Businesses are springing up faster than ever before. Competition is strife in every niche. The only way to win more customers is to remain on their minds. Make your customers think about you, via newsletters, events and loyalty programs. You can also interact with your fans & followers across popular social networking sites.
Correct utilization of marketing budget is essential for all types of businesses. Successful calculation of Customer Lifetime Value makes budget allocation easier. You will have a clear idea about where to increase or reduce your budget. It will help you identify channels that are bringing you more customers.
As a business owner, you must remember that success lies in bringing in the right customer. Customer in itself will not affect your business’ success. Only the right kind of customer will. So, calculate your CLV and be able to make a huge difference to your bottom line.
Do you calculate CLV in a different way? Kindly share your thoughts in the comments below.
Also published on Medium.