Customer Lifetime Value
Customer lifetime value is the value of total money that a company will get from a particular customer throughout his lifetime. It is simply a measure of knowing how valuable a customer is for the brand. Customer lifetime value enables companies in predicting the net profit that will be generated out of a customer by maintaining a long-term relationship with him. It tells how a customer will spend on buying products of a brand. This is an important metric that every brand need to find out as it assists them in taking wise decisions regarding incurring expenses on acquiring new customers or retaining the existing ones. Retaining the existing customers for a longer-term is more economical for a brand than to acquire new ones. Calculation of CLV will lead to formulate efficient strategies by business that will facilitate in enhancing the value of present customers thereby bringing better growth.
Method for calculation of Customer Lifetime Value
Steps for computing CLV is as discussed given below: –
Step.1 Computing average purchase value
The total revenue generated by company during a particular time period i.e. one year is divided by number of purchases made that same time period for knowing average purchase value.
Step.2 Computing average purchase frequency rate
Total number of purchases made during a time period are divided by number of unique customers who have made purchases to arrive at average purchase frequency rate.
Step.3 Computing the value of customer
Average purchase value is multiplied by average purchase frequency rate for finding this value.
Step.4 Computing average lifespan of customer
For this calculation, the numbers of years a customer continues purchasing from the company is averaged.
Step.5 Computation of CLV (Customer Lifetime Value)
Now finally the CLV is computed by multiplying customer value with customer average lifespan. It will reveal the total amount of revenue that a brand can expect from a customer during the course his relationship by making purchases.
Benefits of Knowing CLV to a company
Knowing Customer Lifetime Value can benefit a company in distinct ways which are discussed below: –
- Determines the most profitable clients.
- Determines product which bring highest profit for a company.
- Find out what products are demanded by the customers with highest CLV.
- Amount to be incurred for acquiring customer with similar CLV for maintaining a profitable relationship.
By knowing all these details, business can take effective decisions which could lead to enhance their overall profitability.
Example of Customer Lifetime value
Suppose you have a handkerchief manufacturing business. You spend Rs.10 on promotion for attracting a customer. Customer on an average make a purchase of 8 handkerchiefs every year for 12 years. The profit margin on every piece of handkerchief is Rs. 25.
Based on the above details, total profit generated yearly from the customer will amount to Rs.200. This amount will be equal to Rs.2400. Now for the calculation of net customer lifetime value, amount spend by you on attracting customer will be deducted from the total profit generated from that customer. Therefore, ELV will be equal to Rs.2390.