Do you know how to calculate customer lifetime value (CLV/LTV)?
If not, then you are probably leaving money on the table…
But don’t worry.
I got your back.
I’ll show you exactly how to go about it.
And I’ll even show you, how to use this metric to increase profits in your business.
Here’s how to calculate customer lifetime value:
Total Customer Revenue x Gross Profit Margin = Customer Lifetime Value
(You get “total customer revenue” by answering these three questions:
- How much does my customer spend on average? (average transaction size)
- How often does my customer buy from my business? (purchase frequency)
- And how long does my customer keep coming back? (retention rate)
And “gross profit margin” is your profit after deducting the cost directly associated with fulfilling the orders (materials, labor etc.)).
Here’s an example:
A pet food shop has an average transaction size of €20, a purchase frequency of 2 times per month and a retention rate of 36 months.
That leaves us with a total customer revue of €1440 (€20 x 2/month x 36 months).
And with a gross profit margin of 50% we get a customer lifetime value of €720 (€1440 x 50%).
That’s all there is to it.
So let’s move on and take a look at…
How to Use CLV to Increase Profits in Your Business
First of all, when you know how much a customer is worth to you…
Then you know, how much you can spend to get a new customer (here’s how to calculate customer acquisition cost).
And if you figure out how to make more per customer, than you spend.
Then you can have an unlimited marketing budget (as long as you keep an eye on your cash-flow).
The second thing you can do is to increase your CLV.
(You could do something to increase the average transaction size…
Or you could do something to increase the purchase frequency….
Or you could do something to increase the retention rate…
Or you could do something something in all areas and get exponential growth – my favorite strategy).
And the last but not least, you can use CLV to increase your profits, by figuring out what customer type is most profitable to your business.
(And then focusing on that type of customer.)
To do that, you need to know…
How to Calculate Customer Lifetime Value by Segment
The calculation is the same as above. But instead of taking the average for all your customers. You simply do the math for a specific segment of your customer base.
(You could do the calculation on private vs. business customers. Or on customers that was referred by other customers vs. customers you got via advertising. Or what ever else makes sense in your specific case.)
And maybe you’ll discover a specific type of customer, that is two times as profitable as the rest.
Or maybe you’ll discover a specific type of customer, that is costing you money to service.
And it doesn’t take a genius to figure out that kind of information can make a significant impact on your bottom line (if you act on it).
Now you know how to calculate customer lifetime value (and how to use the metric).
And if you own a business that does at least €250K in sales per year (or the equivalent in another currency).
Then I’ll be happy to take a look at your business and tell you exactly how you can use CLV to increase profits in your case.