How much is a single customer worth to you? Is retention as important as generating new leads? To answer these questions you need to consider the lifetime value of your clients. To determine Customer Lifetime Value means to calculate how much profit you can expect from a single client over their lifetime.
Granted, there is no way to accurately predict the behavior of any specific customer, but you can make inferences. By looking at your client base as a whole, you can statistically determine your retention rate and how much the group will spend. From there, it’s easy to figure out the lifetime value of a single client.
Calculating Customer Lifetime Value (CLV)
You need to gather some basic sales information from last year to get started: last year’s revenue, number of purchases, number of customers and customer retention rate. Using those numbers you can plug them into our CLV Calculator to find out. The data your receive back is valuable for a number of reasons.
- Do you know how much money you spend to gain a new client?
- How many dollars of revenue does that person need to generate before they are making you a profit?
- If a certain client spends “x” number of dollars a year with your company, how long will it take to break even?
- What are the costs associated with retention?
CLV Directly Affects Your Marketing Strategy
Let’s take a look at a simplified scenario. Company XYZ operates a dog-sitting service. Over the course of a year, they take on 10 customers. Each customer generates a gross dollar amount of $2600 per year. In order to get those customers, Company XYZ has an advertising budget of $1200 per year. That means each customer cost the company $120 to acquire (their share of the advertising expense). Therefore, each customer actually makes the company $2480 the first year. If they stay loyal customers, then subsequent years net the full $2600.
This is a very simple example. If actual goods are involved, you must consider the cost of manufacturing and the cost of marketing. You also have shipping, packaging, and other costs associated with each order. In situations where it takes a large number of dollars to gain a customer, you might even be in the hole the first year. In that instance, it is imperative that you convert them into a lifelong customer or you will never realize a profit.
Customer lifetime value is a wonderful marketing tool which costs very little to calculate and can return rich rewards in terms of improved marketing strategy. You now know how to calculate it. Go forth and make money.
Use the Data to Create Your Marketing Strategy
By taking the time to calculate your CLV, you can improve your ROI (return on investment). The ideal situation is to transform every client into a lifelong customer. Some attrition is normal, but CLV can help you see the real numbers and adjust your marketing strategy accordingly.
Contact us and let us help you craft a marketing strategy that improves your bottom line.