How much are you willing to spend to reach a new customer? Is it worth incentivizing existing customers to stick around? Should you focus on referrals or go after cold leads this quarter? To answer these and many other marketing questions, you need to know your custom-er lifetime value (CLV). Calculating this metric will take some number crunching, but doing the math is more than worth it. An accurate CLV is an invaluable road map of where to spend your marketing dollars.
Put simply, CLV is an estimate of how much revenue you can expect from a customer throughout their relationship with your business. The longer your customer does business with you, the higher this metric gets. Knowing the CLV of your average customer in comparison to the costs of attracting new business is a huge help when planning your long-term growth.
For a simple CLV calculation, you need a few numbers. First, you need to find the average net profit you make from a customer over a set pe-riod. For example, if most customers spend an average of $50 on your services every month, your profit margin is 25%. So, you’re making about $12.50 per customer per month. Be aware, that these numbers will vary, as this is just an example using $50 and 25%.
Next, you have to figure out your churn rate: the percentage of customers you lose every month. For this example, let’s assume your monthly churn rate is 5%. To get your average CLV, you divide your average net profit ($12.50) by your churn rate (.05). That would mean you could expect to earn an estimated $250 per customer over their lifetime. Knowing this, you have a clearer picture on whether to focus on boosting retention (reducing churn) or bringing in new customers.
More industry-specific models for calculating CLV are readily available online. Making use of these sorts of metrics is key to deciding where to spend your marketing dollars. It may mean breaking out the calculator and spending a few hours going through spreadsheets, but this is a number no marketing team can go without.