Every business owner knows that some customers are more valuable than others. But understanding the average value of a customer is a powerful metric you can use to boost revenue, reduce interactions with bad customers, and attract higher quality customers.
Knowing your customer lifetime value (CLV) can help you plan everything from how much you should spend marketing to new customers to how to boost overall customer worth. How do you attract high-value customers? What can you do to focus on relationships with your best customers? Can expanded offerings increase revenue for existing customers? Simple math and understanding CLV can help you start to answer these questions.
Calculating CLV & Catering To Your Business
The lifetime value of a customer depends on the average length of time a customer makes purchases from you and the average dollar amount of each transaction. To get an idea of how much your customers spend on average, you’ll first need to define a unit of interaction. For brick and mortar stores, this number is simple – they look at what a customer spends during a single visit. As a digital company, you may want to focus on how much income you make from a typical marketing campaign, or how much money you average from a customer during a set time frame, such as how much an agency spends per quarter.
Once you’ve determined the unit of measurement, your average transaction value is your gross income divided by your total transaction units. From there, you get a customer spending average by dividing this average transaction value by your number of active customers. This gives you the average revenue prediction per customer.
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The next step for calculating CLV is looking at your customer retention rate. A customer might sign up for an ongoing marketing campaign, or may come to you for a one-time website redesign. Customer retention rate measures how many of your customers become repeat purchasers over a given period of time. When you’ve calculated a value for how much a typical customer spends and how long they’ll stick around, you can computer CLV by multiplying the two values.
Leveraging the Information You Have
Your customer database contains much of the information you’ll need to calculate and start using CLV. Once you’ve determined an overall CLV, dividing your customer base into segments depending on the types of purchases they make and how frequently they buy can give you more accurate numbers.
The nature of your business and the types of customers you work with will guide you towards a valuation that makes sense. For instance, if your business has varying types of customers, it may be more accurate to separate them into categories and calculate multiple CLVs, rather than simply averaging all your customers.
Understanding CLV can help you make the most of your marketing budget because you can define your allowable customer acquisition costs. Once you know what a certain type of customer is likely to spend, you’ll have a good idea of how much you can spend on that market.
The Beauty of Customer Retention
You’ve heard many times that it costs six to seven times more to gain a new customer than to keep an existing one. After you’ve calculated CLV for your customer segments, you’ll have a concrete value for how important a particular customer is likely to be. This data can help you focus on your really good, long-term customers.
For instance, if you determine that the CLV of an exceptional customer is several thousand dollars more than your average customer value, you’ll want to invest more energy to keep that great customer. Research has found that increasing customer retention as little as 5 percent can increase business profits by anywhere from 25 to 95 percent.
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Optimize Your CLV
What can you do to boost customer satisfaction and keep customers returning and spending more? Now that you know your current CLV, you can work on boosting this number. When you measure and track things like average customer spending and lifetime value, this helps you target and nurture your really good customers.
Another way to optimize CLV is to look at new options for business revenue. Is there a premium product category you can offer, or a way to expand services to your existing customers? When you know which clients are high dollar customers and which purchase most frequently, you can think of ways to upsell them that will benefit you both.
Tracking customer metrics is a valuable way to analyze your company’s present performance and plan for future growth. Customer Lifetime Value is a great metric to help you understand customer behavior and attract and retain quality customers.