What is one of the most powerful metrics you can measure in your business?
If customer lifetime value isn't at the top of your list, then you're leading your company down a very dark path. Just take a look at our friends on the other side of the pond.
Roughly 34 percent of marketers are aware of term CLV and its connotations, and only 24 percent are actually monitoring it effectively.
It's likely no better here in the states. Just take a look at your own organization; how well are you measuring CLV (if at all)?
Now sure how to do it? Not to worry, we're going to show you.
Why Is Customer Lifetime Value so Important to Measure?
Since some marketers don't completely grasp customer lifetime value, we decided to give a quick definition.
CLV is the measurement of the average worth of each of your customers (based on how much they spend with your company over the course of the years they stay with you).
This is essential to know because it determines how valuable your current customers are to your business and more importantly, how profitable your business is.
You may learn your business is spending too much on acquiring clients than you are getting in return for scoring their business. That's not good.
However, if you do learn that, there are things you can do. From this starting point of calculating your CLV, you can work on making your customer acquisition process more efficient.
5 Steps to Calculating Your CLV
1. The first step to calculating the lifetime value of your customers is to identify the average purchase value. You do this by dividing your business's total revenue for the year (or any other time period) by how many purchases you get within that year.
For example: $100,000 per year / 2,000 purchases = $50 per purchase.
2. Next, you'll need to find out your purchase frequency rate. You can determine this by dividing the number of purchases for the year by unique customers who purchased in that time period.
For example: 2,000 purchases / 75 unique customers = 26 purchases per customer.
3. Then, you go on to calculate your customer value. You do this by multiplying the average purchase value by the average purchase frequency rate.
$50 per purchase x 26 purchases per customer = $1,300 per customer.
4. Afterward, you calculate the average lifespan of your customers. You can do this by determining how many years customers stay with you.
Just add up the years and divide it by the number of unique customers.
For example: 500 years / 75 unique customers = 6.6 years.
5. Last, you need to calculate your customers' lifetime value. Just multiply your customer value by your average customer lifespan.
For example: $1,300 per customer x 6.6 years = $8,580.
This will paint a picture of the average amount of revenue you can expect from each customer you acquire.
If you see that it's costing you more to acquire customers, don't fret. It's about their long-term value. This is where you'll get your return on investment.
Improve Customer Acquisition and Retention
You'll find that the bulk of the earning potential is in retaining customers. As they say, it's cheaper to keep 'em.
The less you spend on advertising and marketing, the more you can allocate toward customer support, service/product improvement, and building quality content.
Keep in mind that the customer's journey doesn't end when they purchase; that's the start of the next three stages -- retention (satisfaction), expansion (up-sell, cross-sell), and advocacy (loyal fans).
But getting there requires you to have quality data with which to work. Unfortunately, many companies are dealing with "dirty data."
Up to 40 percent of the marketing prospect data businesses use to generate new business is inaccurate. That makes their job a whole lot harder.
So what about you? Are you using inaccurate data? If so, you're going to get inaccurate results.
Find out today just how dirty your data is!