How to Determine Customer Lifetime Value

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Customers are the main backbone of a business. Without having them, a business would go down the drain.

Customer Lifetime Value(CLV) is a type of business metric where businesses determine how much profit they would earn in their relationship with the average customer.

This consists of shipping, customer acquisition costs (CAC), ongoing sales and marketing expenses, operating expenses, and the cost required to produce the product and services a company provides. 

You get to make better  marketing and sales decisions, among other benefits when you understand how CLV works.

Dividing your customers and segmenting them into different categories may offer expanded insights into what’s working well and what isn’t working well for your business.

Importance of Customer Lifetime Value 

  1. Better Forecasting: CLV insights helps you make better decisions so you don’t make the mistake of overspending or sometimes underspending.
  1. Carry Out Major Improvements: If you don’t calculate your CLV, there is no say to know where you have to improve in your business or provide better satisfaction to your customers.
  1. Better Financial Decisions: CLV allows you to provide satisfactory services to your customers thereby increasing your day to day profits.
  1. Tracking of Sales: You can use CLV to track the number of visits per year or quarterly and use that data to map out ways to increase repeat business.
  1. Customer Retention: By investing in CLV, your customers would be impressed by your products and services thereby vouching for your products. 

How To Measure Customer Lifetime Value

  • Determine the value of your average order per year or per month.
  • Calculate the average number of transactions you get.
  • Figure out how long a customer sticks with your business.
  • Calculate the CLV by multiplying the three factors above.

A visual representation can be given in the case of a boutique. If a boutique chain with three locations has an average sale of $4. The typical customer is a local worker who visits two times per week, 50 weeks per year, over an average of five years.

The calculation of the boutique CLV would be;

 $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000

Ways you can Improve Customer Lifetime Value

  • Reward customers with loyalty programs or carry out sales and do giveaways to encourage customers.
  • Make your customer experience smooth and stress-free for them to have a seamless shopping experience.
  • Provide a channel for customer feedback and make sure to address all complaints.
  • Make use of social media to promote your products, services and enhance your visibility.
  • Invest in content marketing to entertain and educate your customers.

Businesses should learn to implement techniques to increase the customer lifetime value, especially since the cost to maintain an existing customer is less than acquiring a new customer.

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