Calculating the lifetime value of your customers (CLV) gives you an estimated value of your company's greatest asset, one that likely does not appear on your balance sheet or in your annual report. It also helps you understand the real value of your marketing and customer retention expenditures.
Most of all, this calculation can drive all of your marketing and business strategy.
Simply calculating CLV can change the way you do business
In marketing, customer lifetime value is an estimate of the net profit coming from the entire future sales relationship with a customer. CLV is calculated simply as average order value x the number of repeat sales x average retention time. More sophisticated estimates might consider customer behavior and your discount rate.
Knowing CLV can change the way you look at your business and how you make marketing (and other) investments. CLV drives reevaluation of the customer as a long-term relationship not as a single transaction.
Knowing what your average customer is worth to you over time gives you a better handle on your customer acquisition and retention costs--helping you choose between different marketing strategies.
Calculating CLV drives your marketing machine
Knowing what it costs to acquire a customer is one of of most valuable pieces of information you need for planning your business investment, followed closely by customer retention costs. Understanding CLV helps you make investment decisions in light of impact on your most valuable asset, lending a longer-term perspective.
CLV calculation enhances marketing planning in several ways:
- Defining objectives - CLV is a more exact measure of the economic development of your business making increasing it is more valuable overall than increasing growth, turnover, new sales, profit, etc.
- Segmenting customers - CLV changes depending on customer segments and types and can be used to devise approach to related customer relations and investment.
- Retention programs - CLV helps determine likely effect on profit of investment in customer retention expenditure/effort involving special offers, discounts, upgrading, etc.
Most importantly, perhaps, CLV can help in designing sales force incentives. You can now assign higher bonuses to selling to or acquiring customers with higher-potential CLV, instead of simply to highest overall sales generated.
CLV enhances your annual report
Your annual report can now trumpet your most valuable asset in specific financial terms, outlining the future value of your customer base and what your company is doing to enhance it. Such effect-driven reporting trumps flowery promotional talk of being "customer centric," making your business appear more valuable to potential investors.