Learn one of the key metrics in any business.
In this article, we talk about what Customer Lifetime Value is and how and why it is worth measuring.
What is Customer Lifetime Value?
Customer Lifetime Value measures the georgia telephone number data total amount of money a customer spends on your brand or in your store over the course of a business relationship – how much an average customer is worth to a business. This metric helps you decide how much money to invest in acquiring new customers and retaining existing ones . CLV is also a good way to understand how customer loyalty is shaping up – if customers are coming back and buying again, that’s a good sign.
The specifics of understanding customer lifetime value, however, depend on the business model and market environment . A car owner’s CLV can be as much as PLN 500,000 if they are happy with their experience and buy several cars from the brand over many years. The CLV of an average coffee drinker can be even higher – depending on how many cups of coffee they drink per day and where they buy them. Conversely, someone who buys a house twice in their life may be worth, say, PLN 45,000 to a real estate agent – although the purchase value is large, the percentage paid to the agent is only a fraction of the total.
In a broader sense, customer lifetime value is a measure of the profit associated with a specific customer relationship. It determines how much you need to invest to maintain that relationship – if you estimate the CLV of one customer at $500, you won’t spend more than that to try to maintain that relationship because it won’t be profitable.
How to calculate CLV?
Customer Lifetime Value is made up of two key factors: average basket and purchase frequency. It is important that the data used for the calculation comes from the same period – otherwise the calculation will not be reliable.
Medium basket
The average basket represents how much a customer spends on average each time they place an order. To get this number how much does it cost importance of business planning to not plan? you simply take your revenue and divide it by the number of orders placed.
Average Order Value = Total Sales / Number of Orders
Purchase frequency
Purchase frequency represents the average number of orders placed by each customer over a period of time. Using the same time frame as the average order value calculation guatemala lists you need to divide the number of orders placed by the number of customers.
Purchase Frequency = Number of Orders / Number of Customers
Customer Lifetime Value
Customer value represents how much a customer is worth to a brand or business on average. To calculate CLV, simply multiply the average order value by the frequency of purchases.
Customer Value = Average Basket x Purchase Frequency
How to increase Customer Lifetime Value?
According to eConsultancy, the chances of selling to an existing customer are between 60% and 70%, while for new customers the figure is between 5% and 20%. Investing resources in increasing sales to existing customers is therefore one of the most effective ways to increase a company’s revenue. In most cases, it is much easier to sell to existing customers than to invest in acquiring new ones.
Here are some ways to increase Customer Lifetime Value:
- Make returns easy. An overly complicated returns process or high returns costs significantly reduce the chances of a customer making another purchase. Studies show that 92% of customers are more likely to return to a store that offers easy and quick returns.
- Interview and stay in touch with your best customers to understand why they continue to choose your brand.
- Make strategic exceptions for your most loyal customers. For example, if someone is planning to cancel your subscription, offer them a better price to continue.
- Set expectations for delivery dates – don’t promise more than you can actually deliver. It’s much better to announce a delivery by February 1st and deliver the purchase on January 20th than the other way around.
- Create a loyalty program that encourages repeat purchases with rewards that are both attainable and desirable.
- Use an upselling strategy to increase your customer’s average basket value – like the famous “Fries with that?”
By monitoring your CLV dynamics over time, you will build a more profitable, successful business by focusing on attracting and retaining long-term customers who will become brand ambassadors and return to shop.