Customer lifetime value (CLV), also known as lifetime customer value (LCV), or life-time value (LTV), is a prediction of the net profit generated by a customer during their entire relationship with you. In simpler terms, as its name suggests, it represents a customer’s value to your company during the period of time they do business with you. Knowing your CLV is extremely important for your business to maximize profitability, which is concerning given its importance tends to be understated and underutilized by many businesses. A UK study found that only 34% of the marketers they surveyed were “completely aware of the term and its connotations.”
Why is Knowing your Lifetime Value Important?
Firstly, understanding your CLV shows you if you are spending as efficiently as possible. The process of calculating your CLV shows you your customer acquisition, marketing, and products costs, and will assist you in determining whether you are spending too much or too little on these variables. Additionally, it tells you your customer’s retention, churn, and frequency rates, and other factors such as your customer’s average lifetime and average order value. Knowing all these will tell you a lot about whether your business’s strategies are the most efficient and effective for the customers you are targeting. Knowing your CLV also enables you to segment customers based on value, allowing you to narrow your focus for the better.
How do you Measure Lifetime Value?
There are many ways to calculate CLV, but we recommend using four KPÍ’s: Average Order Value (AOV), Purchase Frequency (F), Gross Margin (GM) and Churn Rate (CR), and using them as seen on the following model:
Each term defined:
Average Transaction Value (ATV)
The Average Transaction Value is the average total of every order placed with your business over a period (typically a year). ATV is calculated by dividing total annual sales revenue by the total annual number of orders.
Frequency refers to how often a specific customer places orders with your business over a period (typically a year). F is calculated by dividing total number of annual orders by total number of unique customers.
Gross Margin (GM)
Gross Margin refers to the sales revenue a company retains after incurring the cost of the goods sold. GM is calculated by subtracting COGS from total sales
Retention Rate (RR)
Retention Rate, refers to the rate of customers that continue doing business with you over a period (typically a year). RR is calculated by subtracting Customers that left over a period from the Total # of customers, dividing that number by the total # of customers, and multiplying the result by 100 to get the RR percentage.
How to Improve your Lifetime Value (Loyalty)
Customer Lifetime value and customer loyalty mean two different things, but they are closely related given that the more loyal customers are to your business/brand, the higher their lifetime value is. This makes having a loyalty program essential for a business to succeed, as it is one of the most effective methods of increasing CLV. With bLoyal’s omnichannel loyalty platforms, you will gain more return customers with higher average order value while more efficiently managing acquisition and retention costs. bLoyal has an efficient deployment model and attractive subscription options. A typical 10 store retailer using our software has a payback period of less than 6 months and an average return on investment (ROI) of more than 150% the first year, which grows substantially in the following years. You can contact us by emailing firstname.lastname@example.org or calling 1 (877) 869-1715 to get your own personalized ROI AND/OR CLV analysis free of charge.
By Marisa Padilla|2022-03-29T13:27:14-07:00March 29th, 2022|Loyalty|Comments Off on How Loyalty Maximizes Customer Lifetime Value