As a business owner, you know that acquiring new customers is important. But what about retaining the customers you already have? Customer lifetime value (CLV) is a metric that can help you understand the value of your existing customer base and make decisions about where to allocate your resources.
To calculate customer lifetime value, multiply the average purchase value by the average number of repeat purchases, and then multiply that by the average customer retention rate.
This post will show you how to quickly calculate CLV so that you can make the most informed decisions for your business. We’ll also include a handy calculator tool for you to use. Read on to learn more!
Customer lifetime value is a profit metric
Customer lifetime value is an estimate of the total revenue that a customer will generate over the course of their relationship with your business. The metric considers not only the immediate profits from a sale or purchase but also potential future profits.
CLV can be a helpful metric for determining how much to spend on acquiring and retaining customers. It can also inform business decisions about product development and marketing strategies.
How to calculate CLV
To calculate CLV, you need to consider three things:
- The amount of money a customer spends per purchase
- The frequency with which they make purchases
- The length of time they remain a customer
There are several different ways to calculate CLV, but for our purposes, we’ll use the following formula:
- CLV = A * F * D
- A = Average amount spent per purchase
- F = Frequency of purchases per year
- D = Average retention time in years
Example: A customer spends an average of $50 per purchase, makes purchases 4 times a year, and remains a customer for 5 years. Plugging these numbers into the formula, we get:
- CLV = 50 * 4 * 5
- CLV = $1,000
That means this particular customer has a lifetime value of $1,000 for your business. In other words, they will generate $1,000 in revenue over the course of their relationship with you.
Note: If you don’t have the average retention times, you can use the churn rate (the percentage of customers who stop doing business with you) to estimate retention time. Just take the inverse of the churn rate and convert it to years (for example, a 5% churn rate would equal 1/0.05 = a 20-year retention time).
For additional information on CLV, be sure to read Growth Units (available on Amazon.com). The author explains the concept in depth and provides additional methods for calculating CLV. In addition, the guide presents case studies from successful companies, showing how CLV can be used in the real world.
Using a CLV calculator tool
To make things even easier for you, we’ve created a customer lifetime value calculator tool. All you have to do is input your average customer data and the tool does the calculations for you. Give it a try to see how much your customers are worth!
Conclusion
As a business owner, it’s important to acquire new customers. But it’s just as important—if not more important—to retain the customers you already have.
Customer lifetime value (CLV) is a metric that can help you understand the value of your existing customer base and make decisions about where to allocate your resources. Using the formula above, you can quickly calculate CLV and make informed decisions about how to best grow your business.