Have you ever heard of the term customer lifetime value? If so, you still might not fully understand what it actually is, or how you can work it out. If that’s the case, then it’s a good thing you have come across this article because that’s exactly what we’re going to be looking at down below. By the time you have finished reading, you should know what it is, how it works and how you can improve it! Keep reading to find out more.
What Is Customer Lifetime Value?
To put it simply, customer lifetime value projects how much money a customer is going to spend using your company over the entire time that they choose to do business with you. Essentially, it is used to project a customer’s monetary worth to the business over an extended period of time. It’s always cheaper to keep an existing customer than to get a new one, and most business owners know this. But, the amount is going to vary depending on your customers and your business, so there is some calculation involved to work out just how much cheaper it’s going to be.
You might have also heard this as simply ‘lifetime value’, but don’t be put off because they mean exactly the same thing. Use our calculator if you want to figure out your customer lifetime value.
So to help you understand this, we’re going to look at an example. Let’s imagine that you own a store that sells printed T-Shirts with pictures on them. The T-Shirt costs you $10 to make, and you sell them for $30. Imagine you sold 5,000 T-Shirts last year which brings you in a total of $150,000 gross revenue. This gives you a large profit of $100,000. From the 5,000 shirts that you sold, 3,500 were from a one-time sale. The other 1,500 came from repeat purchases.
From here, you can look into the average customer purchase frequency, which is a common metric in the industry. If there are 5,000 and 3,500 unique customers, the average customer purchase frequency is worked out by dividing 5,000 by 3,500. This works out to 1.42. So, then, you can estimate that the average customer then is going to purchase 1.42 T-Shirts from you. If you multiply this by the purchase price of $30, you end up with a customer lifetime value of $42.6.
You can use this equation to work out how to go about getting new customers to use your business. It’s not going to be worth your while to spend anything over $42.6 because you aren’t going to be able to turn a profit and it ultimately won’t work out in your favor.
Other Ways To Work Out Customer Lifetime Value
There are multiple ways that you can calculate customer lifetime value depending on the data that you have. For example, there is a way to work it out using the average annual revenue per customer and the average customer purchase frequency. There is also a more complex way to do this calculation that requires the total company revenue for the year, total purchases in the year, total of unique customers, and the average number of years a customer continues purchasing from you.
How Can You Improve Customer Lifetime Value?
If you want to improve your customer lifetime revenue, then there are a few things that you can do. For example, first, you can increase the average purchase value. Or, you could increase the frequency of customer purchases and the number of customers you have. Trying to improve this can be done through things like improving customer satisfaction. If you’re going to go down the route of increasing the average purchase value, then things such as discounts and coupons are going to come in handy for your business. It looks simple when it’s written down this way, but doing these things can be quite difficult. But, if you stick to it, and make the right changes, you should be able to boost your customer lifetime value.
However, it’s not as simple as it first appears because you should also be factoring in customer acquisition costs. If you don’t, then you’re not going to get a complete idea of how much each customer is going to be worth to you.
Hopefully, now you have a better understanding of customer lifetime value, as well as how you can work it out. Good luck, and we hope that you found the information that you were looking for!