When you run a business, it’s important that you understand the concept of customer lifetime value, as well as how you can work it out, and why you need to know. In this article, we’re going to be looking at the importance of customer lifetime value, and why it is essential that you understand it. There are so many benefits of understanding your customer lifetime value, and if you want to know more about this, keep reading down below to find more information.
What Is Customer Lifetime Value?
In short, CLV is how much a customer is going to be worth to a business over the course of their business relationship. You need to know the metric because it is going to cost you less to keep an existing customer than to try and get new ones. As such, increasing the value of your current customers helps towards the growth of your business and is easier than acquiring new clients. For example, if you have a customer lifetime value of X and it costs more than X to get a new customer, then you could end up losing money which is not something that you want to be happening if you can avoid it.
One of the easiest ways to figure out your customer lifetime value is to use our quick calculator.
Why It’s Important To Know
So, the first reason that it’s important to know your customer lifetime value is that it will help you develop strategies to get those new customers. It will also help you keep the ones you already have, without having to take a dive in your profits. The higher the customer lifetime value is, the greater your profit is. It costs roughly five times more to get new customers, but when you know the lifetime value, it doesn’t have to
If you think about it, your customers are not just worth the amount of money that they spend today. They have the potential for future value if you manage to keep them buying from your business. Some companies forget that the customers they already have are just as important as the ones they are trying to entice to their business, but by looking at the customer lifetime value, they will realize that existing customers have potential value. Their actual value is what they spent in one day, but their potential value is going to be based on how much they could spend over the span of your relationship.
You can also use your customer lifetime value to make improvements within your business. It provides you with a whole host of information that you can use to keep your business in the clear. For example, it will help you to understand if your offers are currently suited to your customers. As well as this, you will know how much you should be spending to acquire a customer and how much it is worth investing to win back customers you previously had. All of this data will help you take your company to the next level.
What Are Your Customers Costing You?
While it is important to track your CLTV, you’ve also got to keep a close eye on the cost of that customer. This is what is known as Cost to Serve, and it will show you if the cost of serving an existing customer is coming too high. Even though you have a high customer lifetime value, you could still be making a loss if this is the case. That is why you’ve got to be careful with this and see it more as a balancing act than anything else.
Your cost to serve might be higher in the first year of a contract, but then drop the longer that they stay with you. As such, if the renewal rates drop, then your average cost to serve is going to rise, meaning that your profits are going to be taking a hit. Being able to understand these numbers and keep track of them is the best way that you can get the whole picture. You will be able to understand what is encouraging the customer to spend money with your business, as well as what it is doing for the bottom line.
We hope that you have found this article helpful, and now see the importance of knowing about customer lifetime value. It’s a very valuable metric for your business and one that you really can’t afford to have no knowledge of. By knowing the customer lifetime value of your business, you are giving yourself an advantage that not all business owners have, and a way to increase profits!