Why Customer Lifetime Value is Important and How to Calculate it

Most people underappreciate the purpose of Customer Lifetime Value, which is crazy because it’s essential in the growth of your business! This is the one time that you cannot drop the ball! Customer Lifetime Value may not seem like an important quality, but refusing to calculate your CLV may cause you to fall behind your competitors in the long run. 

Customer Lifetime Value is a measurement of how valuable a customer is to your company. It tells you how much your customers like your products and services, how well you are resonating with your audience, and how you can improve. It also helps with other things like sales, marketing, product development, and customer support. The CLV does not base a customer’s value based on singular purchases. It measures the amount of money that a customer will spend on your business over the lifetime of your relationship. 

For example, let’s say that the same customer visits your coffee shop every once in a while and spends a total of $50 per year at your shop. If that customer continues spending money at your coffee shop for the next 5 years, then their CLV would be $250. Although the math was simplified for the purposes of this example, this simple calculation can be determined by multiplying the average monthly transactions, the average amount spent per transaction, the average number of months that your customers remain loyal, and your average gross margin. 

Your business cannot thrive without knowing this essential information. Studies show that it costs less for a business to keep an existing customer than it does to attract a new one. Specifically, the odds of selling to a current customer are 60%-70% while the odds of selling to a new customer are 5%-20%. Your customers are not just the money that they spend on your business today. They also have an incredible future value if you can keep them as customers. Most businesses have seen major growth merely by increasing the value of their already existing customers. 

The CLV helps businesses maintain a lasting relationship with loyal customers while learning how to build relationships with new customers as well. The CLV goes hand in hand with Customer Acquisition Costs (CAC). Customer Acquisition Cost was created to tell you how much you need to spend to acquire a single new customer. For most businesses, the cost of acquiring a new customer is determined by the costs of generating a new lead and the costs of converting that lead into a customer. The Customer Lifetime Value number can only make sense if you take the Customer Acquisition Cost into account. 

There is so much value in knowing your business’s Customer Lifetime Value. Calculating your CLV can help you determine how much you need to spend to acquire a similar customer and still have a profitable relationship, what kinds of products customers with the highest CLV want, which products have the highest profitability, and who your most profitable clients are. These decisions can help increase your business’s profitability. 

In the midst of everything going on, you cannot forget the value that your customer provides to your business. They’re a valuable asset whose importance shouldn’t be swept under the rug. You can capitalize on their importance by attempting to understand the customer experience so that you can measure feedback. Attracting a new customer requires a ton of time and energy, such as advertising, marketing, special offers, and more. We previously established that it costs much less to keep a recurring customer. A few things you should be asking yourself before you do anything are: 

  1. How much do I need to spend to get a customer? 
  2. What do I have to do to keep this profitable?

If you know the answer to these questions, then you will be putting yourself in a great position to get ahead of your competition. There are also some proven techniques that you can use to start boosting your CLV. These proven techniques should be used to sell to your current customer base to increase the likelihood of them buying from you. Some examples of things you could do would be to make it easy for customers to return items, communicate expectations of delivery dates, create a rewards program to encourage reoccurring purchases, build brand loyalty by offering freebies, upsell your items, and make it easy for customers to get in touch with you. 

You will build yourself a more successful and profitable business just by doing these simple things. Keep your focus on retaining your current customer base and attracting new customers and you’ll see your business flourish like you’ve never seen before.