Why Is Customer Lifetime Value Important?
As a business owner, you need to cater to your customers. Having satisfied and loyal customers is extremely vital to the growth of all businesses since, at the end of the day, the gains, and the profit one makes are due to the customers. However, not all of your customers can be put in the same basket. Each has a different impact on your business i.e. has a different worth. In the business world, we refer to that as customer lifetime value. But, what exactly is customer lifetime value and how do you calculate it?
Further on in this blog, you can find the fundamental details relating to this topic: what is customer lifetime value (or CLV) and how to calculate it.
What is the customer lifetime value?
Customer lifetime value is a metric that presents to you how the profitability of your business depends on your customers. It shows you how much income you can expect from your customers. Certainly, making a profit is the goal of any business, so knowing your customers, knowing their value can be rather beneficial for you. It can help you make better decisions about when and how to invest in acquiring new customers. It, however, also shows you when it is time to let some of them go.
How to calculate customer lifetime value?
Customer lifetime value gives you an idea of how much revenue you can expect from each customer over a certain point in time. As a business owner, you can either calculate this metric yearly or choose custom time frames. It depends on your preference. However, the key points you need to focus on are the following:
- The value of the sales from a particular customer
- The number of transactions from the same customer
- How long this individual will be your customer and use your products or services
- The profit margin
Now, the first three elements above give you the lifetime value, or LTV, which is simply called the turnover. After the initial calculation, you add the final element to the lifetime value and you get the final customer lifetime value amount.
For a better understanding, here is an example. Let’s imagine you have a café. Your customers on average spend £10 per day, and they visit your café twice a week. This gives you a total of 80 transactions per customer. So, if this customer remains with you for the next 3 years, the LTV would be £2,400. However, as a business, you have costs, and these costs will be covered by the amount of LTV. Now, let’s say, once you’ve covered the direct costs, your gross profit is 60%. Then, the customer lifetime value you are left with would be £1,440.
Conclusion
Knowing your customers and what they bring to the table can help you run your business more effectively. Each customer has a different value, and being aware of this would mean making better decisions in the future. Ignorance might be bliss sometimes, but when it comes to business, you must always keep an eye open. Befriend your numbers and work alongside them.
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