Business

Video: What is Customer Lifetime Value

By 10/12/2019 No Comments

Today we would like to talk about the most important one, which is Customer Lifetime Value.

It measures how much profit your customers will generate during their relationship with your company. It shows how healthy your customer base is, and how likely your company is to grow in the future. Let’s call it CLV from now on.

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The truth is that Customer Lifetime Value is a very important metric that can be used to make decisions about sales, marketing, product development, and customer support

This KPI is critical to identifying the most profitable type of customer for your business and those that will bring more results in the future. For example, CLV can be helpful to design loyalty campaigns and promotions that benefit those customers who bring prosperity to your business, so that your investment has more focus and higher returns.

We could say that the CLV measures how good your relationship expertise really is, and therefore it’s the first metric you need to implement. Knowing the health of your relationship gives you an indication of what you can expect in terms of revenue and cost to maintain that customer.

So, how can you measure it, and how can you use CLV for your business?

Let’s say that if you have never used this KPI before, you could start by measuring the single values that we need to make the calculation. For example, you could ask yourself these questions: “how much do I need to spend to get a customer”? Or;  What do I have to do to keep this relationship profitable?”

There are several formulas you can use to calculate the Customer Lifetime Value, but we recommend to use a simple one, like the one we use at Wonderflow, which is as follows:

CLV equals to profit per year multiplied by the average duration of the relationship

CLV = Profit per year  X Average duration of the relationship

How do you find the average duration of the relationship with my customers? 

To calculate this you just have to divide the number of your customers by the sum of the years they have been your working with you. 

Here’s an example: you have 10 customers, and the sum of the duration of your collaboration with them is 36 years. The average duration of the relationship would be 36 divided by 10, 3.6 years.  (36 years/ 10 customers =3.6 years)

Now let’s say that on average you sell your product for 5 thousand euros per year and that to serve a client you spend 3 thousand euros. Your profit would be 5 minus 3, resulting in 2k

(5k -3k = 2k)

To obtain your customer lifetime value you just have to multiply 2k per 3.6 years, resulting in 7 thousand two hundred euros. Is it clear enough? If not, I would recommend reading more at the link that you find in the link.

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