How to work out the lifetime value of a customer

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What value does a customer bring to your business during their life cycle? There are various ways of defining and working out the exact values, but one thing is for sure – understanding the customer life cycle is pivotal to the long-term success of your business.

Customer lifetime value, also known as CLV, is a very powerful tool for helping you to understand and predict the long-term revenue of your business. It gives you an idea of the profits you can expect to make from a typical client during the relationship they have with you. Once you have worked out this number, you can then make decisions about how much to invest in each customer journey and work out how much to spend to try and retain them, often in favour of trying to find new ones.

What you need to know is that your chances of selling a product to a new customer are a fraction of what they are for making a sale to an existing customer. In this sense, keeping a customer is much cheaper than getting new ones. Of course, all businesses grow by finding new customers, and the CLV is a great tool for finding the right balance.

How to calculate the CLV

Your method of making this calculation very much depends on the type of business you’re running and the resources you have at your disposal.

One of the most obvious ways is to look at the historical data. Since you should already have all the data on previous purchases, it’s an easy task to add these up and take an average. Another option, rather than taking an overall average, is to single out certain groups to take a cohort average. These are easy calculations to make but because they rely on past data they aren’t always accurate for future trends.

Another method is to use predictive calculations. This uses algorithms that can predict the total value of a customer across their relationship with your business. You will need to use some metrics to enter data into the algorithm but this should give you an accurate answer. You can also adjust this so it can take into account time periods and other variables. You can find calculators for these kinds of algorithms online.

Alternatively, you could work with marketing specialists like us here at Juiced Marketing. We are experienced in working with customer lifecycles and can help you to find accurate information for your business. We can also help you to apply these calculations and work out what your next best move could be.

There is no doubt that understanding your customers is an essential tool for helping your business to grow. We can work with you to understand the methods for getting this information right. Once you understand your client base, you can start taking the steps to keeping them happy for longer. Get in touch to start your customer knowledge journey.

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