How to Calculate Your Customer Lifetime Value

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Throughout the lifetime of any business entity, customers will always come and go. But excellent services or products can keep clients satisfied yet still craving for more. Their hunger to get more of your product or service continually adds value to the business as you continue to relate with your customers.

Calculating your customers’ lifetime value is an excellent way of analyzing your company’s acquisition strategy. It helps you understand how much the company can afford to acquire new patrons across different marketing channels.

This intricate piece offers all you need to know about this methodology.

What Is Customer Lifetime Value?

Customer lifetime value (CLTV) is the metric that entrepreneurs use to estimate the aggregate revenue the company can reasonably anticipate from a single client account. The primary consideration here is the client’s revenue, and this value is usually compared to the predicted client’s lifespan.

You can use this metric to identify crucial customer segments that bring the most value to the business.

By evaluating the CLTV with regards to CAC (the cost of customer acquisition), you’ll know how long it’ll take you to recoup the entire investment necessary for earning new customers. This includes sales and marketing expenses.

Reasons to Calculate CLTV

If you want the company to gain and retain a highly valued clientele, the most useful thing to do would be to learn the approach and how it benefits the business.

One of the primary reasons to calculate customer lifetime value is client retention. The longer the client continues to buy from the business, the greater their lifetime value.

According to recent study findings, you should expect 80 percent of your business’s future revenue to come from only 20 percent of the current clients. This means you should focus more on your repeat customers as they are the ones with tremendous potential to raise your returns on investments. 

You’ll realize that each customer shows varying values of cost per acquisition, revenue per client, and other crucial metrics.

This means that if you measure CLTV, you’ll know the correct amount of resources to invest in retaining the existing clients. It also helps you create an elaborate spending plan and apportion the right budget to acquisition and retention.

With the CLTV strategy, you can define explicit marketing objectives and sales approaches to cut on acquisition costs and maintain high retention. It also offers a wealth of useful data on your clients and users so you can answer questions like:

  • The amount you’ll spend in acquiring customers
  • What you should invest to win back or retain clients
  • How much time you should spend on client acquisition
  • Whether your offers are tailored for your best customers

How to Calculate CLTV

CLTV is a financial projection that rewires you to make informed assumptions. You must have correct estimates of values like the average number of transactions, average sale, and the business-customer relationship duration. Established entities with rich client data can make more precise calculations of their customer lifetime values.

So, how do you calculate CLTV?

The first step is to find the lifetime value. You’ll get this by multiplying the number of transactions, the average sale value, and the average relationship period.

Since this value is computed in terms of gross revenue, operating costs are not considered. This includes the cost of creating the product, management operations, and advertising expenses. To finally get the customer lifetime value, you must consider the expenses.

This means you’ll multiply the lifetime value by the profit margin.

For instance, consider a business with an average sale of $100. The average client passes by to shop thrice every year for three years. In this case, the lifetime value will be:

$100 * 3* 3 = $900

After computing the overheads, expenses, and the cost of goods sold, the business ends up with a 20% profit margin. The average customer lifetime value, in this case, will be:

$900 * 20% = $180

The business can use this value to project cash flow and learn the number of clients you need to attain a particular profit goal.

Factors That Contribute to the Customer Lifetime Value

Here are the critical factors with the most impact on the CLTV:

  • Churn Rate – This describes how often consumers stop purchasing a product they’ve previously used. The rate differs from company to company, and the variation is based on the competitive advantage that a company commands.
  • Customer loyalty – If a consumer lacks a sense of dedication to a product, they may be deemed brand-agnostic. It would be best if you established a sense of loyalty to cut on churn rates and grow your retention.
  • Scalable sales and marketing – How scalable are the sales and marketing approaches in your business? If your revenue growth directly correlates with the sales and marketing costs, don’t hesitate to optimize the efforts. If revenue goes down, yet these costs still grow, you may end up in a loss.

Tips for Increasing Your Customer Lifetime Value

How businesses tweak their customer experiences to raise the customer lifetime value is among the most asked questions. People seek the luxury of an adequate safeguard against disruptions by business rivals, but not most companies achieve this.

In such a case, you must implement strategies to enhance operational efficiencies and impress clients with a targeted, custom, and relevant brand message.

  • Effective communication – With an open communication line between you and your clients, you’re sure to enjoy enhanced relationships.
  • Effective onboarding – Churn rates are usually highest after the first interaction, but a positive first impression can reverse this. Ensure you educate your clients on your products’ benefits and the features that will solve their problems.
  • Retargeting – One effective way of improving CLTV is by re-engaging clients who already have previous experience with your product or service. It can significantly increase your brand recognition.
  • Loyalty program – This approach can personalize the customer experience of your company and facilitate repeat purchases.

You’re in Safe Hands

To attain a favorable number of loyal clients as your brand ambassadors, you need a robust marketing strategy and an industry expert to help you generate more leads and increase conversions. ATTN seeks to understand your vision to implement, scale, and optimize an effective marketing strategy. We also report our progress extensively to ensure you’re aware of your growth.

Contact us today and get a comprehensive 12-point audit of your brand.

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