A customer is the most integral part of the business. Without a customer, a business would never sustain itself. Not only should a business have customers, but they should also be loyal to your business. Loyal customers will always buy your products and services. If you want to know how helpful your customers are to you, you should calculate the Customer Lifetime Value. This the measure of the value of the business that can be traced back to your customer in his or her entire interaction with your business. In short, this is measurement on how valuable a customer has been to your business from the moment they first purchased your product or service. This is a very major part of your business’ statistics which helps you tune your marketing style to improve your sales leads.
How is the Customer Lifetime Value Calculated?
The basic formula for calculating this metric is;
The Average Order Value X Number of Repeat sales x Average Retention Times
For example, if a customer always buys a cup of coffee at the cost of four euros every month at the same Coffee Shop for three years. Then his or her Customer Lifetime Value is a hundred and forty-four euros. The easiest way to calculate the Customer Lifetime Value is to add up the revenue you have gained from a customer and then subtracting the money you have spent on them.
Estimation and Prediction
Analysing Customer Lifetime Value by calculation is time-consuming. This takes longer because of going through your customers’ records and by going through your expenditure records to calculate the amount of money you have spent on your customers. That’s why you should estimate or predict the Customer Lifetime Value of your business. Prediction is a reliable means to not only understand your customer’s worth but also to check their value trend over a certain period. The major problem with estimation and prediction is that you as a business owner are unsure of how long the relationship between you and your customer will last.
Why is the Customer Lifetime Value important?
This metric helps potential investors gauge the perfect time to invest their money in a particular business. Since this value has a trend over a certain period, you as a marketer will take notice of when customers are most likely to spend less money. You will then decide to spend your money at a more profitable period. Also, this metric helps to determine customer behaviors. It will help you identify when your customers spend their money on your business. You will then decide on how you can compel them to buy more of your products and services. This may prompt you to change something about your product that may cause a shift in the trend at certain periods or trying out a different customer service approach.
Customer Lifetime Value will help you learn more about your target audience and how you can reach them. For example, your Customer Lifetime Value might be high on holidays and women are the most frequent spenders in your business. This information will help you tailor your products and services based on this data to gain more profits. This metric will help you get a rough estimate of the amount of money you have to spend on ads all over the internet to attract more customers. This estimates work best if your product is payable all through the year such as Television subscriptions. Business will now have the hard task of trying to acquire new customers while also retaining the current ones to maintain a favorable profit margin.
How much do your customers cost you?
As I said, Customer Lifetime Value is the value of business attributed to the customer. Even if your customers spend all their money on your business, you might be making losses because of the amount of money you might be spending on them. As valuable as your customers are to your business, the revenue you are getting from them should be substantial enough to keep your business afloat. If you are spending too much money trying to lure them to your business, then it might be time for you to think of other methods of advertising. If your business to customer sales leads are low, you will have to try other marketing methods. The main aim of running a business is to make a profit. Therefore, calculate all these estimates before delving into another marketing campaign.