I am a true numbers geek. My initial fascination with the discipline of marketing was learning that data can even predict something as seemingly random and variable as human behavior. I can get lost for hours in the analysis of data and the calculation of metrics.
But after years of academic study and practical experience with businesses large and small, I find that there is really one critical number that stands out. Customer Lifetime Value (often abbreviated as LTV or CLV) indicates the success and long-term viability of your company. Quite simply this number is an average or approximate number for the value each customer means for your business over the entire lifetime of your relationship. It is the result of:
The Value the Customer gives to you:
- Payment for Initial Purchase
- Subsequent purchases
- Affiliate purchases
- Maintenance contracts
- Service and support, repairs
- Training and education in usage
- Renewals (in the case of memberships, subscriptions, or retainers)
- Referrals and recommendations
- Prestige or experience
Less your costs (in time, money and risk) in delivering products and services.
Customer Lifetime Value tells you the net business value for each and every customer. Once you know this number, you have a pretty good basis for answering key questions:
- How much can and should I spend in marketing to acquire new customers?
- How hard should I work to retain existing customers?
- How should I price?
- How many prospects do I need in my pipeline to sustain operations?
- How can I up the CLV over time to grow my business?
Below is a great infographic from Kissmetrics on the specifics of calculating lifetime value. Even if you are not a natural numbers geek like me, this is one number worth knowing.
Please share below any of your experiences or questions on CLV.
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Source: How To Calculate Lifetime Value