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How you calculate the Customer Lifetime Value

customer lifetime value woman with credit card
 

For developing business success, it is not only important for a company to create a large customer list. Rather, you should try to bring the relationship of customer acquisition costs (CAC) to customer lifetime value (CLV or LTV) to the right level. That means controlling two of the most important unit economics. 

This on the one hand means finding ways to reduce the costs of acquisition and on the other hand find ways to increase the value of the customer. The second part typically means elaborating on customer retention. By calculating the value of every customer and estimating its change over the years, a company can convert its less desirable customers into a valuable asset.

 
Recently the Forbes Magazine wrote about why you should balance your Cost of Acquisition against the Customer Lifetime Value.
 

What is Customer Lifetime Value?

The CLV details the average profit a company can expect to receive from every client over their entire relationship. Inflation and retention rates are taken into account to project how a customer ltv changes year by year. A simple model shows the impact of marketing costs and discounts on CLTV. More complex models can be built to include separate types of customers, retention rate fluctuations and different products.

The main function of the CLV is to agree on the true value of a customer. It shows what value a buyer has for a company all the way through its customers. When customers appear on your website, you can make use of the Customer Lifetime Value to estimate what profit the customer will make in the long term. With the help of CLV, marketing costs, as well as budget questions, can be calculated in a better way.

 

A Process to Calculate Customer Lifetime Value

There are lots of formulas by which the CLV can be calculated. Most of them are rather weighty and difficult in the execution. 

But, you don’t have to worry about it! There is a lot easier method to calculate the CLV.

Before you calculate your Customer Lifetime Value, you need two key metrics: the average order value * and the repurchase rate.

Before calculating the customer lifetime value, you must know about two key measurements:  the normal request esteem * and the repurchase rate. 

This makes it easy to decide the Customer Lifetime Value. First and foremost, calculate your customer retention rate **: If 80 out of 100 last year's clients are still your clients this year, your client retention rate will be 80%.

After that, the use the following simple customer lifetime value formula to find the customer value:

Customer lifetime value = 1 / (1-customer loyalty rate) 

In the previous instance, with a customer retention rate of 80%, your client lifetime would be 1 / (1-0,80) = 5. So you need a customer life of 5 years.

Presently base your average contribution margin and the repurchase rate on. In the example, these are 50 € and 2 purchases a year. Finally, the price of customer buys *** is removed, here 15€.

Customer Lifetime Value = (contribution margin * repurchase rate) * Customer Lifetime - Customer Acquisition Cost

Value of customer lifetime:

(50 € * 2) * 5 - 15 € = 485 €

What's more, you need to consider various other influencing factors for the Customer Lifetime Value:

·  Temporary contracts

·  Discounts that you grant to your customers

·  The cost of customer loyalty

·  Seasonality: The client retention rate is normally calculated on an annualized basis, but depending on the industry, your customer lifetime value may change.

·  Moreover, the Customer Lifetime Value can also be calculated over different periods than one year and employed as a forecast.



LTV very often comes to Pareto

Customer Lifetime Value is a clear look at the advantage of getting and keeping any given customer. Not all clients are made equal. Actually, the top 1% of e-commerce clients are worth more than 18 times up to average clients.

As a business owner, you should have the capacity to concentrate your efforts on getting the potential clients—the clients who will take your business from being a flash-in-the-pan accomplishment to a household name.

While CLV is extraordinarily valuable, it’s traditionally quite hard to calculate. In case, if you’ve endeavored to uncover your CVL in the past, you have most likely gotten yourself knee-deep in a complex algorithm as well as formulas. 

Fortunately, there are a lot easier approaches to figure out your CLV. Client behaviors are exceptionally hard to predict and can seem to be quite random at a glance which makes CLV an essentially unpredictable measure to track. Simply think about it. A few of your clients may make small buys each week and others may make big buys per year and their wide ranges of combinations in between. 

By measuring your CLV, you can easily know about how frequently specific types of clients will make buys and when those same customers will quit making buys for good.

Although there are various advances strategies for calculating Customer Lifetime Value out there, the approach that we have described above is a simple and easy way for you to get the information you need to refine your approach to client obtaining. 

 

Why is Customer Lifetime Value an important unit economic? 

We all are familiar with the fact that it is more expensive to obtain new scenarios than to preserve existing ones - thus widening your CLV is important to a strong business model and retention strategy of customers.  

Have a look at a some of the reasons why utilizing CLV as a central metric is important if you want to boost productivity, preservation, and success of your ecommerce business.

1. Generate real ROI on customer acquisition

Customer Lifetime Value helps you concentrate on the channels that give you the best and the most advantageous clientele. You should be optimizing your marketing channels with respect to the lifetime value a customer puts into your brand, instead of the gross profit on the first purchase.

If you are concentrating on CLV, it will change the finances of your customer acquisition strategy. Out of the blue, you can pay a large number to obtain a customer as you are not hampered by the earnings produced from a particular purchase, but from the purchase made over time with your product.

2. Perk up your Action triggers

By sorting out data into natural clusters, you can find out the action triggers that boosts your best consumers to make their initial purchase. When you take a observe your stunning results, you must be trying to reproduce this action with your potential consumers in order to convert them into first-time purchasers.

By using the above-mentioned strategies to calculate Customer ltv, you’ll effortlessly have the capacity to take a preview of your customers’ acquiring history and flip it into a widescreen estimate of their future activities.

 

Get started with understanding your customer lifetime value

A lot of businesses act blindfolded when it comes to knowing about the value of their customers. Be different and get the insights of how much are you able to invest in customer acquisition always in the correct relation to customer lifetime value.

Contact us if you want to be supported on this data-driven approach

You want more impulses to Customer Lifetime Value?

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André Wehr
André Wehr
As a founder and entrepreneur, I experience every day how important Traction and Customer Centricity is. It makes the difference between a nice idea and a viable business.

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