Creating customers for life.
You may have heard the saying “it costs five times more to acquire a customer than it does to retain your existing one.” While every business is different, it’s still a good rule of thumb to keep in mind. Selling to strangers is always going to be harder than selling to your existing customer base. So, it makes good business sense to keep existing clients happy, and aim to create not just customers, but customers for life. An important part of this from a sales planning sense, is knowing how to calculate customer lifetime value, customer retention rate and other important metrics that communicate how you’re tracking in this area.
The reason our customer lifetime value (CLV) is such an important metric to track, is because it measures customer relationship with your brand. Also, CLV connects directly with revenue – both from an historical perspective, and projecting into possible future revenue. Changes in customer lifetime value can indicate trends in growth, or decline, so a really important metric to track in your business.
Press play on the audio, or keep reading below, to find out how to calculate customer lifetime value, and the benefits of tracking this metric for growing sales.
How to calculate customer lifetime value.
Customer Lifetime Value (CLV) is the measure of an average customer’s revenue. We track how much a client typically spends generated over the entire relationship with the company. The simple CLV formula is:
Customer lifetime value = customer value X average customer lifespan.
Customer value is calculated by finding the average purchase value, multiplied by the average frequency of purchase. To calculate the average purchase value over a year, for instance, we divide annual revenue by the number of deals won over the year.
To find out your average customer lifespan, we calculate the total of all customer lifespans, and divide that number by the total number of customers.
So hypothetically, if someone spent two and a half thousand dollars, and they do that every five years for 25 years, that would be two and a half thousand times five, so that would be $12,500 as the CLV or the Customer Lifetime Value.
4 benefits of measuring and analysing CLV.
1. It helps you understand the customer journey more deeply.
By pinpointing those clients with the highest CLV, you can start to get an accurate picture of what is driving repeat business. Who are your best clients? What services are they purchasing? How do they find you? What was the sales process you took them through? How much did it cost to acquire them? What is the real value they’re coming back for?
2. Tracking CLV helps you increase your revenue.
By understanding CLV, you can increase your efforts in areas that lead to greater customer retention, and that ultimately lead to increased revenue. It helps fine-tune costs to acquire new customers (by being able to target the right ones more accurately) and helps you identify which services you should double-down on.
3. It increases predictability.
By having good historic data on customer lifetime value, you can make predictions about your customer into the future. It helps you forecast revenue. It also enables you to know what the future behaviour of your best customer is likely to be. Facilitating better and more informed decisions all along your customer journey.
4. CLV indicates the depth of customer connection and brand loyalty.
Keeping a finger on the pulse of this metric is like your early warning sign. If something is off – from a customer service perspective, right through to lead quality, you will feel it in the resulting increase, or decrease in CLV. It’s one of those metrics that, like customer retention rate, measures your H2H (human-to-human) capability. And after all, this is what really matters at the end of the day.
Important to know that we just don’t keep our blinkers on when we’re closing business. Always look for the medium to longer term. What is the customer lifetime value or the potential? And as I say, we just don’t want a customer, we want a customer for life. So, it adds up to some pretty big bucks, and more importantly, really satisfied customers.
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