Business Growth Insights

Understanding Customer Lifetime Value is Critical to Business Growth

Customer Lifetime Value

Written By Richard Mawer

Richard is the founder and CEO of Ignite Growth Consultancy, he is an expert in digital marketing, strategy, sales, processes and systems. Also the author of the #1 Amazon best selling book "Remarkable Business Growth", he has been helping small business owners to grow to £1m turnover and beyond for the past 25 years using his proven STEPS Growth Methodology.

Customer Lifetime Value (CLV) is a pivotal metric in business growth. By grasping this single stat, businesses can not only multiply their growth but also streamline marketing efforts and minimize customer attrition. We have seen businesses 10x their business growth by understanding this single stat, but it can also help you to spend less time on marketing campaign management and reduce customer churn too.

What is Customer Lifetime Value?

In essence, CLV gauges the cumulative value a customer brings to your business over their lifetime. Modern CRM platforms like Hubspot can help categorise customers based on their CLV. Recognizing high CLV groups helps hone your lead generation strategies, ensuring you get the best bang for your marketing buck. Ultimately, understanding CLV can influence your Cost of Customer Acquisition (COCA), another vital metric.

The importance of Customer Lifetime Value CLV

Why is CLV Important?

Using CLV, businesses can focus on attracting “good fit” customers, enhancing user experience, boosting customer retention, and promoting referrals. It’s more than a number; it’s a strategy to nurture customer relationships and foster business expansion.

Calculating Customer Lifetime Value

There are four pieces of data required to calulate CLV.

1. Average Order Value (AOV): Determine the total value of sales made to a particular segment and then divide it by the number of orders within a 12-month span.

2. Average Number of Repeat Sales: Find the average number of times a customer returns to make a purchase within a year.

3. Customer Retention Rate: This metric reveals how adept you are at maintaining customers. It’s calculated using the number of customers at the start and end of a period, minus the new customers acquired during that time.

Customer Retention Rate Formula

4. Customer Lifetime: This is the average duration customers stay engaged with your business. To ascertain this, use your customer retention rate in the formula: 1 / (1 – retention rate).

Bringing it Together

With these metrics, determine the CLV for each segment:

Average Order Value x Average Number of Repeat Sales x Customer Lifetime = Average CLV

Ensure you perform this for every customer segment in your CRM to pinpoint where to allocate resources and marketing funds.

Benefits of Leveraging Customer Lifetime Value

When businesses dissect CLV across various segments, such as demographics, buying habits, referral sources, and lead origins, they often uncover overlooked segments brimming with potential. We advocate concentrating on these high-value segments to augment revenue and growth.

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