Customer Lifetime Value: All You Need to Know
Find out, in simple terms, what customer lifetime value is and how it impacts your business.
Customer Lifetime Value - What a Customer Really Means to Your Bottom Line
Customer Lifetime Value, or CLTV, is the total amount of money that a customer will spend with your company throughout your business relationship minus any costs needed to secure that customer i.e. acquisition costs. These include marketing, advertising, introductory offers, and other means of generating new leads.
The Importance of Customer Lifetime Value
CLTV helps you gauge how much money your business has spent on acquiring new customers and how much you can reasonably expect from your returning customers. Knowing this information helps you decide which customers to target based on the amount of value they generate for your company. You want to keep the CLTV high and the customer acquisition costs low.
How to Calculate and Boost Customer Lifetime Value
While there are several ways for a business to calculate the lifetime value, here is one of the most common methods:
Step 1: Establish the average monthly revenue per customer
Divide the total revenue of a customer by the number of months it has been since they first shopped with you. Taking the average monthly revenue for customers, we put new and old customers on the same playing field.
Businesses may choose to focus on a small sample of customers just to get a rough idea.
Step 2: Multiply the average monthly revenue by 12 to get annual CLTV
Knowing the annual revenue will give you a more useful metric to make decisions.
Step 3: Subtract the acquisition costs
Removing the marketing and promotion costs needed to get these customers will give you a clearer picture of your customers' values.
A surefire way to increase customer lifetime value is by providing quality customer service that both surprises and delights your customers. This way you can increase customer retention and the value of your relationship organically, without resulting to costly promotions.
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