Calculating Client’s Lifetime Value
The lifetime value of a client is an easily overlooked and often underutilized concept. Don’t risk doing yourself and your business a huge disservice. Why track customer lifetime value, or CLV?When you know the CLV, you have data you can use to your advantage. This data can be applied to customer retention initiatives, marketing campaigns, referral programs, and, most importantly, keeping repeat clients happy. Plus, when you know the current CLV, you can work to improve that number. There are different ways to calculate CLV, and some methods are more complicated than others. At a minimum, you need to be tracking the following data points: A. The money spent by each customer (the revenue your business gains per customer, factoring in the margins of the products or services you provide) B. The time frame for each client purchase (the average amount of time you keep a client)
C. The initial cost of acquiring a client
With this data, you can then calculate CLV: A x B – C = CLV
Just keep in mind this number is based on averages and will not give you precise information (for a more comprehensive method of calculating CLV, check the Wikipedia entry for ‘customer lifetime value’). The more data you have to pull from, the more accurate the number will be. For instance, if you’ve been tracking A, B, and C for the past six years, you will have a more accurate picture of CLV than a business that started tracking last year. Think of it as an efficiency formula. With this data, you can determine which are your best clients and which are not. From there, you can tailor your marketing endeavors and get far more out of your marketing dollar.
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