Do you know your Customer Lifetime Value?
I asked a business owner if he knew his customer lifetime value (CLV) and his customer acquisition costs (CAC). He didn’t know and that’s okay, most don’t.
However, if you don’t know the value of a customer, it’s difficult to know how much you should invest in acquiring a new one. If you think a customer is worth $5k, should you spend at most $500, $1k, or $2k to get a new one?
What is CLV (Customer Lifetime Value)?
Your Customer Lifetime Value (CLV) is the total profit you expect to receive from your average customer over the relationship’s lifetime. Suppose your average customer pays you $2500 per quarter and stays with you for three years before leaving. Then, suppose your profit margin is 33%. With this, your average CLV is $10k ($10k X 3 years X 33%). All in, your total sales and marketing (acquisition costs) should be under $2k per customer, but this ratio varies by business.
Rather than guessing at your CLV, there are calculations you can apply to arrive at your specific number. I’m happy to share these if anyone is interested. Defining a clear CLV is crucial for a business owner to minimize costs and maximize profits.
Try this free online calculator for a quick result!
The Importance of Ideal Customers:
By analyzing and segmenting your entire customer base, you can determine the lifetime value of both your current and ideal customer profile. Then you can use this information to target even more ideal customers which will help to grow the business.
Three critical factors for any growing business are to:
1. Retain your ideal customers for as long as you can.
2. Expand the financial value you get from (and the positive experience you give to) your ideal customers.
3. Acquire new ideal customers at the lowest feasible acquisition cost.
These critical factors all revolve around your Customer Lifetime Value. Without it, you won’t be able to acquire new ideal customers at the lowest possible cost; It’s simple…but not easy. You can use all of this information as a part of developing your marketing strategy which is imperative to any growing business