How To Calculate Your Customer’s Lifetime Value
It’s that time of year again! No, I’m not talking about the holidays, I’m talking about strategy planning season for marketing departments. Figuring out how many new customers you want next year, how much budget you can spend, how much of that budget to allocate to social media, and on and on.
Strategy season, as I like to call it, can be a stressful time for marketers. And too many are doing it wrong. Yes, you heard me, many aren’t looking at some of the most significant numbers to figure out where you need to be with your strategy.
One of the first things that many of you are missing is calculating your Customer’s Lifetime Value. This number will help you decide how many marketing dollars to spend on social media to get the number of impressions you need to generate your new customer goals for the year.
Your Customer’s Lifetime Value (CLV) is the amount of revenue a typical customer will generate for your business during the customer’s engagement with your brand.
How many of you know your CLV?
This seems like a value that would be tough to determine, but it’s actually pretty simple. The first thing you need to know for the calculation is the average your customer spends every time they purchase from you. Let’s use a water delivery service as an example. Say the typical customer spends $100 per month for your water services; you can count on that revenue from your customer every time they purchase from you.
The next item you need to know is how many times a year does your customer typically buy from you? Do you have a monthly service that they purchase, do they buy quarterly or less? In our water service example, the customer purchases from you once per month.
Finally, how long do you usually keep the customer? For our example, I’m going to say that the water service keeps their customers for a five-year period.
Then you plug these data points into the formula;
$ per purchase x purchases per year x length of customer lifetime purchases
Based on that information from our example you can show CLV as $100 per month times 12 months times five years equals $6,000 CLV, so each new customer is worth $6000 to your business.
$100 x 12 months x 5 years = $6,000
So you can calculate that for each new customer, you’ll generate approximately $6000 over five years.
This number will be an important factor in your next step which is calculating your Customer Acquisition Costs.
Now’s the time to calculate your Customer Lifetime Value, tomorrow we’ll use this number to calculate your CAC.