Calculating Customer Lifetime Value (and why it’s crucial to profitability)

Know How Much Your Customers Are Actually Worth

Average Purchase Value (APV)

The first step involves the calculation of the average purchase value, APV, which determines the average amount of money spent by customers during a given time-frame. This is calculated by dividing a company’s total revenue (in a year according to our example) divided by the total number of sales during that time.

Average Purchase Frequency (APF)

The next step involves calculating the average frequency of sales experienced by a company. This refers to how often customers make purchases during a given time-frame. We can acquire the average purchase frequency by dividing the total number of purchases in a year with the total number of unique customers during that time.

Customer Value (CV)

Customer value must be calculated before determining the CLV. This refers to how much a customer spends during a given time frame (as opposed to the entire lifespan of the business-customer relationship). Customer value can be calculated by multiplying the APV with the APF.

Average Customer Lifespan (ACL)

ACL is the final metric required for CLV calculation. It refers to the average number of years that a customer purchases actively from a business before settling into a dormant business relationship.

Customer Lifetime Value (CLV)

Business owners will be able to calculate the CLV of their company once they have established the CV and ACL values. This is achieved by multiplying the CV with the ACL. The acquired value is the expected revenue from an average customer during the entirety of a business-customer relationship. CLV plays a major role in determining business strategies as it determines the urgency of customer retention rates and when to act.

Putting it all Together

We will be referring to a hypothetical bubble tea business to demonstrate the calculations of the CLV model.

Improve Customer Lifetime Value, Increase Profits

Ways to Improve Customer Lifetime Value

Customer lifetime value is essential in assessing the success of a business. Although the acquisition of new customers is a necessary process in the future of a business, customer retention is equally, if not more crucial. Keeping the right customers/regulars has been proven to strengthen business revenues. Research shows that a 5% increase in customer retention has been known to raise profitability as much as 95%.

  • Paying careful attention to the initial customer experience, and providing exceptional onboarding processes. This means that brands need to ensure that customer queries are swiftly attended to while products and services are of the highest quality. The first impression on a customer is a major factor for CLV results.
  • Retaining customer relationships by fostering brand loyalty through personalized services, and loyalty programs that offer incentivized services.
  • Retargetting past customers who have become inactive. Provide a reminder of the brand’s offerings with a soft approach. Businesses dealing with perishables will have an easier time convincing customers to replace expired items via renewed patronage.

Seeking Professional Support

Lift Digital Marketing is a specialist in the field that provides businesses with effective marketing solutions for their branding needs. Our team is ever ready to optimize strategies that will raise the profitability of your marketing campaigns. Contact us to learn how we can improve your customer lifetime value for long-term results.

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#Digitalmarketing entrepreneur with over 20 years of experience in start-up, small, mid-market, & enterprise businesses. http://www.linkedin.com/in/aaronwelch

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Aaron M Welch

Aaron M Welch

28 Followers

#Digitalmarketing entrepreneur with over 20 years of experience in start-up, small, mid-market, & enterprise businesses. http://www.linkedin.com/in/aaronwelch