Often overlooked in the business world, utilising a Customer Lifetime Value Calculator can provide the leverage you need to match or even overtake your industry competition.
CLV (Customer Lifetime Value) allows you to assess if you are attracting the right audience for your brand, whether your customers enjoy your services or products, and tells you exactly what you are doing right – and exactly what you are doing wrong.
For the entrepreneur or savvy business owner, this information provides a vast wealth of knowledge that unlocks the potential for massive marketing and sales growth.
Now, what marketer or business owner wouldn’t want the key to that information?
While arithmetic isn’t exactly everyone’s’ strong point – learning how to calculate customer lifetime value doesn’t require high-level equations. CLV is simply the average amount of money your customers will spend on your services over the duration of your working relationship.
Customer Lifetime Value (referred to as CLV or LTV) is the amount of reveneue a company can expect to earn from a single customer through the customer lifetime. It gives you an indication of total expected return from a customer.
Customer Lifetime Value holds extreme importance to any business or service provider. Each of your customers that you are able to attract and retain to your company has the potential for future profits as well. The higher the number, the greater the profit. When you work out your customer lifetime value you can improve it, target your weak points, maintain your strong points and increase the potential to earn more.
The metric helps you identify the Return on Investment (ROI) on a new customer acquired and validate your Cost of Customer Acquisition. As a rule of thumb of your Customer Lifetime Value (CLV or LTV) should be 3 times your Customer Acquisition Cost (CAC).
Your CLV may be either predictive or historic. Use a CLV calculator to predict what your customers may spend in the future by calculating the actual spend by your previous clients over the years. The most simplistic method is the historic model, as you already possess accurate data, such as the following:
• Average amount spent per purchase
• Average monthly transactions
• Average number of months for customer loyalty
• Average gross margin
Your CLV is equal to the transaction value multiplied by your average gross margin.
Alternatively, multiply Average Order Value with Purchasing Frequency and Average Customer Lifespan.
Use the following formula to calculate CLV:
Customer Lifetime Value = Average Order Value * Purcase frequency * Average Customer Lifespan
Churn rate is critically important for businesses whose customers are on subscription-based payments or recurring payments. Regardless of monthly revenue, if your average customer will not stay around long enough for you to recoup your customer average acquisition loss, your business is in trouble. Despite your best efforts, churn is often inevitable.
Your average customer lifespan is simply the amount of time a customer has remained with you. For example, if a customer has engaged your services over the course of one year, your customer lifespan has averaged 365 days. Customer lifespan and attention will also depend on what niche or industry you are in.
Average order values are determined by calculating your sales per order, not your sales per customer. Even though one customer may make multiple separate purchases, each order is factored separately into AOV calculations. You need to calculate your revenue divided by the number of orders placed which will provide you with your average order amount.
Working out your purchase frequency data tells you how many times a customer makes a purchase or orders services from you within a specified timeframe. On a TLV calculator, simply add up the amount of total order you have taken within the previous year, divide that amount by the number of unique customers to get the average purchase frequency for a one year span.
Working out your customer lifetime value isn’t as complicated as it sounds, and assists your business to unlock the key to its fullest potential. Don’t miss the opportunity!