Customer Lifetime Value (CLV) is a measure of how much profit a customer will bring to your business over the lifetime of the relationship that exists between you two. The customer is the most valuable asset in your business. Knowing how to acquire and maintain this great asset is the key to a profitable business. CLV helps you determine where to commit you money in marketing campaigns before you launch them in order to reap higher benefits.
There are several formulas to arrive at the Lifetime Value of a given customer; the most efficient one is given by:
CLV = (Sales per customer) x (Customer lifetime) x (Number of referrals) x
(The percentage of referrals that turns customers) – (Cost of sales)
To arrive at these data you can use the following simple steps to estimate each parameter. For some idea of the benefit of SEO visit: http://happytalkmedia.com/seo-townsville.html
Sales per customer can be obtained by taking the sum of sales and divide it by the total sum of customers in a given period. Customer lifetime is the estimated number of times you think the customer will reorder a given product or service.
The number of referrals made is a conservative estimate of how many people have heard about you through a particular customer. A satisfied customer often makes casual reference on his or her blog, social media page or post a comment on a forum about a wonderful shopping experience that you provided. These comments can be read by hundreds to thousands of people. You can collect this information by asking your new customers how they heard about you.
Customers Guesstimate the percentage of the referrals that will buy something from your business to arrive at the percentage of referrals that convert to. Finally calculate the cost of sales by taking the sum of goods or services and divide it by the sum of customers that you have sold to in that period and multiply the quotient by the customer lifetime figure calculated earlier.
Importance of Lifetime value to your business
It serves as a benchmark in determining how much money, time and effort you can commit in acquiring a given customer in the first instance. You become confident of reaping benefits such as enhanced corporate image and increased sales from your current investments.
Lifetime value of a customer helps you to re-focus on your marketing campaigns. Once you realize that your customers are an ongoing stream of revenue rather than a one-shot sale, you get motivated to focus on ways of keeping them or repeat sales as loyal customer are likely to buy more. Loyal customers cost less to service. Experienced customers know how to use your products or services and make fewer calls to customer support and request fewer visits from the sale rep thus reducing the overheads.
Limited acquisition cost is yet another benefit of calculating lifetime value of a customer. Loyal customers are much more likely than not to be your advocates. They will recommend you to their associates and friends and happily speak about your products or services. This brings in more customers with little or zero acquisition cost. Lifetime value helps you identify the best customers; understand what best they see in your business thus helping you come up with real marketing objectives and strategies.