How to calculate customer lifetime value and why it is important

Every business tries its best to identify customer needs and preferences, predict their behavior and use accumulated knowledge in creating better marketing strategy or defining sales volume with limited time and resources.

What is CLV

One of the key metrics for obtaining these goals is a customer lifetime value (CLV). In general, this is the amount of profit a customer will generate during the entire relationship with the company. But CLV is not only about money and future profit. This is one of the most important indicators which lets the company know about really important, active and profitable clients and their overall percentage, necessary resources for marketing campaigns and customer retention and factors affecting customers value.

So, the basic issues which can be solved using CLV are:

  • What should the company do to retain the customer and how much to spend?
  • Who are the best customers?
  • How to enlarge the quantity of the best clients and which products and services should the company offer to them?
  • How much money should the company spend to acquire a new customer?

How to calculate CLV

Now we know why CLV is so important and useful for any company but how it is calculated?

The thing is that the more information and valuable inputs you have, the more accurate CLV you will get. There is simple and easy approach to calculate lifetime value:

CLV = (ARPU per customer * Gross Margin per customer) / Monthly Churn Rate

The ARPU is the Average Revenue Per User and together with gross margin they form average profit per user. Churn rate is the percentage of customers who end their relationship with a company in a given period.

So, basic steps for CLV calculation are:

  • Calculation of a customer lifetime
  • Calculation of churn rate and retention rate (opposite to churn rate)
  • Calculation of average revenue per user
  • Calculation of revenue and costs for delivering services or products

More deep and powerful analysis requires individual way to define CLV for a specific company with more inputs and variables. Such an analytic platform can be successfully deployed if there is strong analytical background and appropriate experience. Biclast solutions has all the necessary skills for individually configured CLV implementation in the company with a specific type of activity. We offer profound data analysis which results in maximum usage of current data and company facilities and also provides some recommendations for future data collection, systems and processes improving.

…Biclast solutions has all the necessary skills for individually configured CLV implementation in the company with a specific type of activity. We offer profound data analysis which results in maximum usage of current data and company facilities and also provides some recommendations for future data collection, systems and processes improving.

Conclusion

It is important to remember that CLV is not a constant value. It can be changed and the company have to do its best to improve CLV throughout marketing campaigns and smart sales prediction. Once the company got the lifetime value, it received a powerful tool which can help retain customers and predict their future behavior. And if the company convince its customers to come back for its services or products again and again, it will create a source of revenue with relatively little costs and establish a great potential for business growth in future.