Customer lifetime value (CLV) is a performance indicator that every company should know and understand. Why should they? Because it's a barometer for measuring the long-term success of a customer relationship. CLV enables us to assess the total value generated by a customer over the entire duration of his or her relationship with the company. Understanding CLV enables you to improve customer relations: by identifying what keeps customers coming back, you can improve your product or service, offer better customer service, and thus increase overall customer satisfaction with your company. CLV helps you make decisions on a host of important elements, such as advertising budgets, marketing actions, and even product design. A high CLV generally means that your customers like what you do and will continue to buy from you.
Calculating CLV can be quite straightforward. Often, it boils down to multiplying the average value of a transaction by the number of recurring transactions and the length of the customer relationship. By knowing the total value a customer can bring, a company can adjust its marketing and advertising spend. For example, if a customer's CLV is $1,000, spending $100 to acquire the customer may seem more reasonable than if that CLV were only $200. CLV helps identify the most profitable customer groups. Let's consider two types of customers: those who make a one-off purchase and those who return regularly. Although regular customers may have a higher initial acquisition cost, their lifetime value (LTV) could be much higher, justifying the initial investment. Note that LTV is not set in stone. It can change according to customers' buying habits, prices, and even economic conditions.
Add the average value of the customer's order in dollars; then their purchasing frequency, i.e., their number of orders per year; then the customer's lifespan in years; and let the calculator tell you the LTV of your customer in dollars.
You're happy when people click, buy, or register on your site, aren't you? But what if those same people came back again and again? Customer lifetime value lets you quantify this loyalty. But to be able to count on positive figures for your business, you’ll need to put some key actions in place!
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