Would you like to be able to predict your future relationship with a customer? If the answer is yes, you should consider calculating the customer lifetime value (CLV). This is a marketing prediction that helps businesses calculate how much money they’re likely to get from their customers in the future based on the customers’ behavior. In today’s article, we’re going to look at customer lifetime value. We’ll see what exactly it is, how you can calculate it, and what its main benefits are.
Customer Lifetime Value: Brief Guide
#What Is Customer Lifetime Value?
Customer lifetime value is a prediction of the value a business will get from its relationship with a customer. The prediction looks at the entire relationship. This means its length will have to be an estimate, since it’s impossible to know how much it will actually last. There are many ways in which you can calculate CLV, some more accurate and sophisticated than others. We’ll provide one of the simplest ones today.
#How Can You Calculate CLV?
The simplest CLV formula is the annual profit you get from each customer times the average number of years he or she might still be your customer minus the initial sum that you paid for his or her acquisition as a customer. For example, if a customer generates a profit of $2.000 a year, and they’re likely to stay with your brand for 10 years, but you paid $1.000 for their acquisition, the formula would be $2.000 X 10 – $1.000, which would be $19.000.
#What Are the Main Benefits of the CLV?
1. Customer Targeting
Finding out the CLV of each client can help you come up with creative ways of convincing them they should buy more of your products. You can target specific customer groups according to how much money they’ve made you and how long they’re likely to keep doing that. Then, you can provide special offers that you know will appeal to them. Ultimately, this will help you gain as much revenue as you can from one customer.
2. Customer Satisfaction
Another extremely important benefit of calculating customer lifetime value is that you’ll know whether your customers are satisfied with your services and are purchasing your products or if there’s something you can do to increase their satisfaction. You’ll get a better understanding of their behavior and needs, and you’ll eventually improve their loyalty.
3. Future Demand Prediction
Let’s not forget that knowing how much money your customers have spent on your products and how much they might spend in the future can help you with future demands. You can make sure the most requested products are always available and your inventory is constantly up to date. This goes for services as well, not only for products. You’ll also be able to decrease productivity loss, because you’ll know where the most resources are needed.
We hope this brief guide on customer lifetime value has convinced you of how important it is to take the time and calculate how the relationship with your customers might look like in the future and what it could mean for your company.
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