Many businesses are yet to fully understand what the value of a customer is.

The questions seems easy enough (What profit does each customer bring each week? Each year? Over a lifetime?) But many businesses still struggle with these questions and this gives rise to 2 problems:

• Uncertainty about Marketing: For example, what is the number of new clients you would like to attract and what is the appropriate budget for acquiring that number? Defining customer value can guide your strateges.
• Ambivalence Regarding Customer Retention: With a metric against which to measure customer value, you can navigate the appropriate parameters for retaining them or expanding the business they do with you. According to research, increasing customer retention rate by merely 5% increases profits by 25%-95%

Customer Lifetime Value

Formulas for calculating customer lifetime value (CLV) abound, but a basic approach requires breaking down the calculations into five digestible parts in this manner:

1. Average Order Value (AOV): AOV is calculated as how much money is spent per customer in a year, divided by how many orders are placed by that customer within that timeframe.
2. Purchase Frequency (f): The number of orders/visits/transactions from the past year, divided by the number of unique customers you had within that time frame. The resulting total is the frequency or how often the average customer purchased from you.
3. Customer Value (CV): Customer value is calculated by multiplying the AOV by the purchase frequency. The result is the customer value over 1 year.
4. Average Lifespan/Time (t): This is how long the customer actively connects with your business before they move on or grow dormant. This can easily get complex, but to keep things simple you can either go with a broad estimate (an educated guess) or you can calculate an average based on a representative group of known customers. For example: Total Length of Commitment/Number of Individual Customers = Average Customer Lifespan (t).
5. Customer Lifetime Value (CLV): You can now calculate this value by multiplying customer’s yearly value by the average customer lifespan.

Sure, this is a somewhat simplified equation, but even a ballpark figure is more helpful than no idea about what each customer is worth to your business. With this figure you can decide things like: the amount to spend in customer acquisition, how much to spend in fostering loyalty, and so on.

A benchmark CLV will give you a helpful base in marketing and loyalty programs, as well as inform your sales goals for the coming year.

Your Customers Are Your Future

Your customers are directly related to your future success and your livelihood, and it will be difficult to thrive without investing heavily in acquiring new customers.

So, what are the obstacles between you and your target audience? Has the uncertainty of direct mail marketing been a thorn in your side of late? Why not reach out to us for help? We offer sophisticated, simple ways to reach a mass audience for an amount that works within your budget.

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