Determining customer lifetime value (CLV)
Customer lifetime value is the total worth of your customer’s business throughout the entire duration of their relationship with your company. It is an important metric because it costs less to get more business from an existing customer than to acquire a new one, so focusing your marketing efforts on your existing customers is a great way to drive growth.
Customer lifetime value, or CLV, goes hand in hand with another key metric we've already discussed: customer acquisition cost. Customer acquisition cost is the money you invest to get a new customer to purchase your product or service, including advertising, marketing, and special offers. The value of the customer's purchases throughout their entire lifecycle is important to remember when considering customer acquisition cost.
Let's say it costs you $15 to attract a new customer. The total sales you can expect per customer is your average order value, divided by one, minus the repeat purchase rate (50% + 1% = 0.1% = $55.56). Subtract your customer acquisition costs, and you get a lifetime customer value of $40.56. Subtract your purchase costs to determine the full customer lifetime value.
Let’s break down the calculation of customer lifetime value. In other words, for your CLV calculation, you need to calculate the average order value and multiply it by the customer's repeat rate. You can find the customer’s repeat rate by checking your organization's records to find out how much revenue has resulted from their purchases over a given period (for example, one year) and how many purchases have been made in that period.
Brand loyalty is another critical factor when considering the value of a customer’s business over time. Customers who are loyal to your brand will keep coming back and continue to purchase from your company. If a customer does not feel any loyalty to your brand, a competitor could lure them away—and there goes your investment. Which is why it is so important to continue to invest in your existing customers with loyalty programs, check-in emails, and other marketing efforts so that they continue to generate revenue.