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Customer lifetime value measures the profit your business makes from any given customer.
What can you do with Customer Lifetime Value?
Customer Lifetime Value is the single most important metric for understanding your customers. CLV helps you make important business decisions about sales, marketing, product development, and customer support. For example:
- Marketing: How much should I spend to acquire a customer?
- Product: How can I offer products and services tailored for my best customers?
- Customer Support: How much should I spend to service and retain a customer?
- Sales: What types of customers should sales reps spend the most time on trying to acquire?
How do you calculate Customer Lifetime Value?
When calculating CLV there are many nuances to consider based on what the specific questions are that you want answered. But the most straightforward way to calculate CLV is to take the revenue you earn from a customer and subtract out the money spent on acquiring and serving them.
Estimate your Customer Lifetime Value
Performing in-depth customer lifetime value analysis is time consuming. Here's an example to give you a back of the envelope estimate:
Let's say that the value of an average order at your business is $50. Any time someone makes an order, whether it's their first or their third, they have a 10% chance of coming back and making a repeat purchase. Finally, let's assume that it costs you $15 to acquire each new customer.
The total revenue you can expect to get from each customer is your average order value divided by one minus the repeat purchase rate, or $50 / ( 1 - 0.1) = $55.56. Subtract your customer acquisition cost from that, and you get a customer lifetime value of $40.56.
How to predict your Customer Lifetime Value
CLV can be calculated historically, over specific time periods, or it can be predictive. Each of these calculations serve different purposes. But, predictive CLV is the most powerful way to not only understand what a customer is worth to you now, but also how their value will change overtime.
Let’s look at an example of this for the ecommerce industry. The chart below shows CLV benchmark data from nearly 200 ecommerce companies. In this chart we’re looking at the most basic form of CLV. It has a single input, sum of all purchases, and closed time parameters, 365 days.
On day one, customers with the highest lifetime values have already distinguished themselves. This means marketers don’t need to wait long to make important invest-or-kill decisions about their marketing campaigns. CLV is the best metric to predict future customer behaviors.
Improve your Customer Lifetime Value
Improving your Customer Lifetime Value can have a dramatic impact throughout your business. Let’s see how the estimate we calculated above would change if with an improvement to the underlying assumptions.
Improve Repeat Purchase Rate
Improve Average Order Value
What should your Customer Lifetime Value be?
Only your data can accurately answer this question. If you need help extracting insights on CLV from your existing data—get in touch. Stitch is a data consolidation tool that that makes it easy for online companies to build their data infrastructure, calculate CLV, and get a 360 degree view of their business.
Calculate customer lifetime value across all your data sources.
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