Customer Lifetime Value (CLV) represents the total revenue a business earns from a customers over the course of their relationship with your company.
How do you calculate customer lifetime value CLV )?
Calculating your business’ CLV, and figuring out how to optimize it, is an effective way for business owners to work towards long-term, sustainable growth. After all, a higher CLV means your customers are shopping with you more, whether in terms of orders made or money spent.
There are a couple of different ways to calculate CLV, depending on what information you’re trying to glean from the data.
Accumulated Data Method: This option gets the sum of the gross profit from all historical purchases for an individual customer. Here’s the formula:
CLV = (Transcation 1 + Transcation 2 + …. + Last transaction) x Average Gross Margin
Predictive Method: This option uses predictive analysis that accounts for previous transactions plus various behavioral indicators that forecast the lifetime value of an individual:
CLV = (Average Monthly Transcations x Average Order Value) x Average Gross Margin X Average Customer Lifespan
What are the three components of CLV?
Churn Rate: How long do your customers patronize your business before moving on to something else? Your customer attrition rate directly impacts the number of orders a customer is likely to make over time.
Customer Loyalty: You want your customers to exhibit loyalty to your brand, instead of shopping from any business within your industry category. If they’re loyal to you, your business will receive more orders from each customer over the course of their relationship with you.
Scalable Sales and Marketing: If your company’s revenue growth is directly connected to sales and marketing expenses, then you need to optimize those efforts. If revenue decreases but your sales and marketing expenses continue to expand, at a certain point, you'll end up at a loss.
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