As a business owner, you’ll undoubtedly deal with a lot of facts and figures. Having solid data can allow you to make smarter decisions that translate into sustainable growth.
That’s certainly the case with your customer’s lifetime value. Understanding exactly how much a customer is worth for your business can help you understand what’s working (and what isn’t). Let’s take a closer look at why customer lifetime value is so important and how to figure out these figures for yourself.
What is Customer Lifetime Value?
First, what exactly do we mean by customer lifetime value? Also referred to as lifetime customer value or LCV, this is an estimate of how much money a customer is likely to spend with your business throughout your professional relationship.
To put it another way, LCV tells us how much revenue one customer will generate for us over time.
Why Does Customer Lifetime Value Matter For Your Business?
That definition is pretty straightforward. So why do we care about customer lifetime value?
LCV can tell us a lot about our customers and where we stand with them. For example, it can indicate the loyalty of a given customer. A client that sticks around for several months or even years will typically have a higher LCV rate than a customer who leaves after just a month or two. Not only does more time typically equal more money, but we also know that long-term customers are likely to increase their spending over time.
That’s just one reason it makes more financial sense to focus on existing customers rather than new ones. You’ll almost always spend more money to acquire new customers than to retain existing ones. And according to SEMRush, the probability of selling something to a current customer is around 60% to 70%. But you have only a 5% to 20% probability of making a sale to a brand-new customer.
LCV, especially when combined with other metrics, can let you know how likely it is that a customer will churn or if you’re spending too much on marketing and sales to acquire customers that don’t pay off. In other words, you’ll know whether you’re focusing your efforts on the right people and can avoid mistakes that could derail your strategy.
What’s the Best Way to Calculate LCV?
Now that you understand what LCV is and the impact it can have on your business, you may be wondering how to figure out this metric for yourself. There are several complicated equations you can use to determine your customer’s lifetime value.
If you want to calculate customer lifetime value manually, you can do so by dividing your business’s annual revenue by the number of purchases made by customers during a given year. You’ll also need to determine the average purchase frequency, which involves dividing that number of yearly purchases by the number of customers you had in the same period. You can then multiply these figures to determine customer value, which can then be divided by the average lifespan of your customers to reveal your lifetime customer value.
Does that sound overly complex? That’s not surprising. In this day and age, you shouldn’t have to manually calculate these numbers on your own. That leaves too much room for error.
A better alternative would be to use an LCV calculator, which automatically determines these values based on the metrics you enter into the tool. To make full use of the calculator, you’ll want to know your churn rate, the average customer lifespan, your median invoice, your monthly sales and marketing costs, and the average number of new customers you acquire every month. Simply plug in the figures that you know and watch the calculator go to work.
Unlock the Secret to Customer Retention With LCV
Understandably, most business owners want to do everything possible to keep their current customers around. If client retention is an ongoing struggle for your organization, you’ll want to get to the bottom of your customer lifetime value and make changes as needed. By using a calculator tool for LCV, you can gain access to the metrics you need for long-term growth.
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