Customer Lifetime Value, or CLV, is a way to measure the value of a customer over the entire relationship they have with your business. Many companies, and especially online companies, primarily focus on customer metrics such as the click-thru rate or average order amount. However, the CLV gives a much clearer picture of the long term revenue potential for your customer base. It is vital to know how to use this information. It allows you to find out which customers are truly the most valuable for your business, and determine how to keep them as loyal customers for a long period of time. Here are some questions to ask when you are looking at your company CLV:
- Are you paying enough to acquire customers from each channel of marketing?
- Are you acquiring the best kinds of customers?
- Are you spending too much/little on social media for customers?
Customer Lifetime Value ends up being a dollar amount that is associated with any customer relationship that is long-term; it shows how much that relationship is worth over a certain period of time. If your company is not yielding this dollar amount in revenue, it could be a signal that you are spending too much money on acquiring or retaining customers, often times spending the money in the wrong places.
Customer Lifetime Value can determine where exactly to spend your money. For most businesses, it is smart of them to spend their money in multiple areas such as marketing, production, sales, and customer support. With Customer Lifetime Value, you not only find the dollar amount that should be spent on each customer, but also which ones are your best customers, how you can better serve those customers with your products, determine how much service you need to give to these customers to keep them, and which types of customers your sales people should be spending the most time on.
Harvard has designed a calculation tool for determining the lifetime value of a customer based on a number of different factors. These include the average purchase amount, the number of purchases a customer makes per year, the advertising costs to reach this customer annually, and some other tools such as the profit margin for your business and the customer retention rate. All of these can factor into making the CLV of your customer base positive or negative.
By using this tool and others like it you could find out a number of things about your business. For example, you may have customers that spend a lot of money in their first purchase, but a low retention rates means you do not have a sustainable base of loyal customers. Conversely, you may find that your customers do not contribute much to the bottom line initially, but over time their loyalty builds and they spend more with your company. Technical tools such as this can show you how effective your advertising has been, when customers are likely to increase your profits, and how valuable a single customer really can be. Check out our services to find out how to refine your online marketing process, increase your CLV and ultimately grow your business.