Customers come and go over a company’s lifespan, but a truly exceptional product or service can keep customers well-nourished while yet leave them eager for more. This constant desire for more is what provides value to the organization for its client relationships. In this blog post, we will explore the concept of Customer Lifetime Value (CLV) and its role in your business success.
So, what is Customer Lifetime Value?
Customer lifetime value (commonly referred to as CLTV), lifetime value (LTV), or lifetime customer value (LCV) is the profit margin a company anticipates to receive throughout its business relationship with the average customer.
Customer acquisition costs (CAC), continuous sales and marketing expenses, operating expenses, and, of course, the cost of manufacturing the goods and services the company is offering must all be factored into the customer lifetime value calculation.
Many businesses take a short-sighted strategy by ignoring this vital indicator in favor of focusing on a single sale in the near future. Finding new clients is still critical for a company’s growth, but optimizing the lifetime value of existing customers is also necessary for a company to maintain a successful business model.
Why is Customer Lifetime Value Important?
- Affect Your Revenue
The CLV determines the consumers who generate the greatest money for your company. This enables you to provide these existing clients with products/services that they enjoy, resulting in them spending more money with your business.
- Boost Customer Loyalty And Retention
Customer loyalty and retention tend to grow when a company optimizes its CLV and constantly provides value – whether in the form of exceptional customer service, products, or a reward program. Furthermore, a decreased churn rate, as well as a boost in referrals, favorable reviews, and revenue, are all benefits of having more loyal consumers.
- Help You Target Your Ideal Customers
When you know a customer’s lifetime value, you know how much money they spend with your company over time, whether it’s Rs 50, Rs. 500, or Rs 5000. With this information, you can create a customer acquisition plan that focuses on clients who will spend the most money at your company.
- Reduce Customer Acquisition Costs
Getting a new customer can be an expensive endeavor. In fact, according to a Harvard Business Review article, getting a new customer might cost anywhere from five to twenty-five times more than keeping an existing one. Furthermore, according to a study conducted by Bain & Company, a 5% improvement in retention rate might result in a profit increase of 25 percent to 95 percent. These figures illustrate that identifying and nurturing the most important clients who connect with your organization is critical. By doing so, you’ll have larger profit margins, greater client lifetime values, and lower client acquisition expenses.
How to Calculate Customer LTV
Because customer lifetime value is a financial prediction, it necessitates the use of reasonable assumptions. For instance, to calculate CLV, a business owner must estimate the value of the average sale, the average number of transactions, and the length of the business connection with a particular customer. Moreover, customer lifetime value can be calculated more precisely by established businesses with their historical customer data.
The formula is
Lifetime Value = Average Value of Sale × Number of Transactions × Retention Time Period
Operating expenses are not taken into account because the lifetime value of a client is assessed in gross revenue terms. How much did it spend to develop the product, market it, and run the business? When determining client lifetime value, remember to factor in these operating costs.
Customer Lifetime Value = Average Value of Sale × Number of Transactions × Retention Time Period × Profit Margin
Customer Lifetime Value = Lifetime Value × Profit Margin
What should be your next step?
So, you’ve calculated the CLV. So, what’s next? Now you must apply that knowledge to improve and maintain your CLV.
Continue to provide targeted, valuable content to increase consumer loyalty. You should also make sure that this content remains personalized as they progress through their client journey. Ensure that it keeps them entertained and entices them to return. Take track of their previous purchasing patterns and reach out to them based on what they’re most likely to do next.
You can also communicate with them through a variety of means. Customers shop in a variety of methods, including online, in-person, and on their phones, so don’t focus on just one. To reach out and establish loyalty, use social media, sponsored ads, and email. This will very certainly increase your chances of having a longer CLV.