Customer Lifetime Value – What is this?
Before understanding customer lifetime value, Let’s understand first
What is customer value?
Definition of Customer value is the perception of what a product or service is worth to a customer versus the possible alternatives. Worth means whether the customer feels that he or she received benefits and services over what was paid.
Now, You Need To Understand –
What is Customer Lifetime Value and how to determine?
In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or lifetime value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer.
Customer lifetime value can also be defined as the monetary value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.
Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships.
Customer lifetime value is an important metric because it represents an upper limit on spending to acquire new customers.
How much are you willing to spend to acquire a new customer?
If you don’t know how much a customer is worth, you can’t answer that question.
While some businesses keep extensive spreadsheets and track the lifetime value of their customers on money, most do not for small to medium-sized businesses.
When I ask them questions about their customer lifetime value, I am usually given a number for their average sales.
Customer lifetime value is the net present value of the average customer benefits throughout your life, which can be any added potential referral business.
Once you determine the lifetime value of your customer, you can calculate the amount you can spend on acquiring customers.
Just keep in mind that it aligns itself with the growth strategy you are pursuing. After dominating the market it may be worth earning cash to gain market share with the hope of making a profit. You can also find yourself in a situation where you now need to generate profit.
How To Determine the Customer Lifetime Value?
To calculate customer lifetime value you need to calculate average purchase value, and then multiply that number by the average purchase frequency rate to determine customer value. Then, once you calculate average customer lifespan, you can multiply that by customer value to determine customer lifetime value.
What is the Customer Lifetime Value Model?
1. Calculate the average purchase value
You can calculate average purchase value by dividing your company’s total revenue in a time period (usually one financial year) by the number of purchases over the course of that same time period.
2. Calculate the average purchase frequency rate
You can calculate the average purchase frequency rate by dividing the number of purchases by the number of unique customers who made purchases during that time period.
3. Calculate customer value
To calculate this number by multiplying the average purchase value by the average purchase frequency rate.
4. Calculate average customer lifespan
Calculate average customer lifespan by averaging the number of years a customer continues purchasing from your company.
5. Calculate CLTV
Multiply customer value by the average customer lifespan. This will give you the revenue you can reasonably expect an average customer to generate for your company over the course of their relationship with you.
Looking For More Content Like This – Say Yes in Comment Box