Customer Lifetime Value (CLV), Its Importance and How to Calculate it

The primary role in the marketing process is to understand your customers and determine how your rapport with them can bring value to your business. 

As a marketer, rather than thinking of acquiring many customers and how easy you can do that, Customer Lifetime value helps you improve this concern. For digital marketers, the power to calculate or determine what customers might be worth is an appealing aspect, and that's what makes a customer lifetime value. Customer lifetime value is defined as the simplest way to understand your customers, an estimation of the value your relationship with your customers can impact your business. CLV is also referred to as one of the most crucial eCommerce metrics that provides a clear picture of your business's long-term and fiscal feasibility. It is a strategy that every business or organization needs to achieve its long-term success. Through it, one can determine which customers are the most profitable, thus allowing you to focus on your customer acquisition and retention efforts.

Why Is CLV Important for Your business?

Every business owner wants to know one vital purpose, what financial value each of their customers brings to the business. However, CLV is unique in its way because it not only focuses on today, it helps you foresee the coming days of your business. Any business's marketing process requires CLV to cement its financial stability, especially in the eCommerce world. Below are important reasons why you need CLV in your business.

• It directly affects your income/revenue

  It is one way to acquire target customers as CLV helps you identify which customers can spend more than the other. Over a while, you start to plan different acquisition budgets. Through CLV, you can identify the specific customers that contribute the most revenue to your business.

• It contributes to your business's steady cash flow

  CLV lets you determine the financial impact of your marketing campaigns. Once you learn about your historical sales data from your customer, chances are high you will get repeat purchases from existing customers, thus generating a steady cash flow for your business.

• It scales your business to the next level

  Focusing on CLV is Key for Long-Term company growth. You get a chance to reinvest into expanding your business. This could be overseas, developing new products and services, or engaging your business in the Google online marketing challenge that will help generate more revenue because it offers you free advertising assistance from digital marketing students, thus making your business known and attracting new customers.

• CLV helps you in customer segmentation

  Having calculated your CLV, you can segment your customers based on value. It enables you to understand better the different personalities and traits among your customers, which is a crucial step to effective targeting or personalization. It also helps you to predict future spending on a particular customer segment, primarily through internet marketing.

• It helps you target your ideal customers

  Calculating CLV gives you enough time to look at every aspect of your business and make adjustments that could suggestively advance the experience you offer to your customer base.

• As a strategy, Lifetime Value Calculations helps you define specific marketing objectives and sales strategies in your business

  To give you an outlook of your business' health. CLV could also adjust the way you view marketing in terms of loyalty goals, focus your spending on underutilized areas, and get feedback from customers.

How to calculate Customer Lifetime Value? 

There are two significant ways of calculating Customer Lifetime Value. These two aspects are dependent on what data you have available and the purchase frequency of your average customers. The first way is through:

1. Accumulated Data Method

This form of calculating CLV involves you as an internet marketer having historical sales data from your customers. Even though this method is far from accurate, it allows you to put together all past sales according to individual clients and identify their actual CLV. Even when you are a startup or a new business owner, you can use eCommerce analytic tools and resources such as metrilo that will help you gather all the past information from your customers since the first day you opened the business.

In this approach, the Customer Lifetime Value formula is the total sum of the first order plus the second-order, fourth and fifth, etc.

The second approach is the:

2. Average Estimate method

This method of calculating CLV comes in handy when you do not have granular customer data, and you can therefore estimate an average through the following way. This method is beneficial for eCommerce startups or businesses that haven't been in the books for a long period.

CLV is the average order value multiplied by the average number of orders you receive from each of your clients from this second approach.

Other ways that can help you calculate CLV are:

·  Forecasting your customer's life cycle within your business

·  Estimating future products purchased to generate forecast income

·  Estimating the costs linked to manufacturing and distributing future products

The Customer Lifetime Value formula is the most basic way to determine the income earned from your customers: the yearly income multiplied by the average customer lifespan minus the initial cost of acquisition.

From your calculation, if you arrive at a high CLV, it is a pointer of product-market fit, brand loyalty, and repeated purchases from existing customers. You can download a free CLV calculator for your business, a tool to help you determine the lifetime value of your customers.

In summary, customer lifetime value or knowing how much a customer is foreseen to spend on your business for an interval of your association with them helps you find a balance in short-term and long-term marketing objectives and points you to the right customers. It also enables you to understand your fiscal return on investments better, encourages you to form better decisions, helps your marketing process less costly and tedious, and avoids acquiring customers with less value to your business. These are some best reasons why you should learn about CLV and implement it in your business.