Calculating the lifetime value of your customers

Calculating Customer Value

If you are putting any time or resources into getting new customers (which if you are running a business you are) then you need to know one thing - what is a customer worth?

Without this critical bit of information, you run a serious risk of spending more on acquiring a customer than you will recoup.

Take some time to get the most accurate customer lifetime value (CLV) you can. It’s an essential investment to help you build a sustainable business.

Calculating customer lifetime value is a much more robust process if you have a stack of data to use but how do you tackle it if you are small or new business?

If you have some data about your customer buying behaviours, use this as a starting point to inform your estimates. If you don’t have any data yet, then see what you can glean from helpful connections to let you make some rough estimates. Although there are figures out there about industry average conversion and retention rates if you do use these, do so only as a broad indicator - there are simply too many factors that can affect these figures when it comes to your business.

Whichever route you take - keep it live and dynamic and regularly updated with new information as you get it so that it becomes more robust over time.

How to calculate the Lifetime Value of a Customer

At its most basic level, the calculation is:


Customer Lifetime Value Calculation

Things to consider:

  • There are a lot of variables that can impact on this calculation - this is the most basic calculation. Your business will be unique, drill into your variables that will affect this calculation.
  • This calculation is giving you a gross sales value and is not a good indication of your return on investment. To be clear on this, you need to account for all the costs of products, services and servicing as well as expected margins to have an idea of your final return.
  • Do not use average figures if you have multiple products or services at multiple price points. That way lies bankruptcy. If you have a product that sells for £1000 and another that sells for £100, using an average figure will wildly distort the customer value/acquisition cost ratio. Segment your customer base using relevant factors and work out this figure for each distinct aspect of your sales.

High Value vs Low Value Customer 1

  • Big high consideration purchases will have a longer lead in time and greater cost to acquire a lead and convert them to a customer and less repeat purchases. One off purchases with a very long lead in time to any repeat transactions should recoup the cost of acquisition at the first purchase.
  • Small purchases require higher volume of orders to cover acquisition investment and will typically have smaller margins but a higher repeat purchase rate especially for consumable goods. Acquisition costs should be recouped within the first year or the lifespan of the customer if it is shorter than this. As a small business, protect yourself by aiming to recover those costs in the shortest time possible. For example, if you offer a subscription product, recoup the costs within the term of the subscription at a maximum.

Top Tips to Increase Customer Lifetime Value

  • Get brilliant at customer service - think cultivating loyalty not merely satisfaction. Loyal repeat customers will spend more with you and potentially more frequently.
  • Use opportunities to cross-sell and upsell. Are there complementary products that your customers would find valuable or do you have a more sophisticated product that might better suit their needs.? Upsells and cross sells can significantly increase a customer’s value to your business.

Top Tips to Decrease Customer Acquisition Costs

  • Get brilliant at customer service. Customers who have a good experience with your business will stay a customer longer, refer new customers to you and promote the business on your behalf. All of which will decrease your overall customer acquisition costs.
  • Have a customer retention plan - acquiring a new customer can cost 5-7 times as much as keeping an existing one. Keeping your customers happy and encouraging them to stay with you will increase your profits. A retained customer is potentially worth 30% more to you than a new one. Listen to your customers to find out what is really important to them and build your plan around that.
  • If you sell online, make sure you have a customer-friendly checkout process that is easy to use, simple and welcoming. Cart abandonment rates are typically around 70% - every abandoned cart increases per head acquisition costs. Make it easy for customers to complete the sale.

©Polly Hearsey 2018

 
 
 
 
 
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