The Customer Lifetime Value (CLV) is a metric allowing you to know the average income generated by your customers. Why and how to calculate it? And above all, how to increase it? Follow the guide! You know the song: a Burkina Faso Email List funnel, becomes a prospect and then a customer. Sometimes he even becomes a loyal customer. Either way, it generates income throughout its relationship with your business. But how much exactly? What is its total value? The answer to this question has a name: Customer Lifetime Value (CLV)! Its role is to help you make financial forecasts over the medium and long term. The objective is to better manage your budgets and your resources. Does it interest you? We reveal everything you need to know about Customer Lifetime Value!
In summary. What is Customer Lifetime Value? How (well!) To calculate it? Why is CLV an important indicator? 5 tips to improve yours. The Customer Lifetime Value (we will sometimes write CLV to go faster!) Indicates the total revenue that a company can expect from a customer account. In other words: it is a prediction of the average income brought by a buyer until he ceases all commercial relationships with you. Difficult to estimate? Yes and no. Indeed, you cannot guess the duration of this relationship. Some customers stay a few months, others will be loyal for years. It depends on your industry and the nature of your offers. In B2B, the customer lifespan is often longer than in B2C, especially for companies selling complex tools or solutions.
Definition of Customer Lifetime Value
However, there are (almost) simple formulas to apply to calculate this indicator. There are two ways to calculate Customer Lifetime Value: in terms of revenue and in terms of profit. Calculate the CLV in terms of turnover. With this formula, we reason purely in terms of turnover. How much turnover does a customer generate? To calculate it, you will need to know 4 other indicators beforehand: the retention rate, the customer lifespan, the average basket, and the frequency of purchase. The retention rate. This is the percentage of loyal customers, who renew their contract from one year to the next. Take into account your renewal frequency to calculate this rate. For example, if your contracts are signed annually, compare the years 2020 and 2021. What percentage of clients to re-sign in 2021?
If you’ve had 70 contract renewals out of 100 customers, your retention rate is 70%. Customer lifespan. On average, how many years (or months, quarters, semesters, etc.) do your clients stay with you? To find out, apply this formula: In our example, this will be: The customer lifespan is approximately 3 years. The average basket. The average basket determines the number of purchases, on average, per transaction. This is calculated as follows: Turnover / Total number of orders. If you achieved € 650,000 in sales with a total of 175 orders, the average basket is. Frequency of purchase. Purchase frequency highlights the recurrence with which customers buy from your business. It is calculated as follows: A total number of orders / Total number of unique customers If we follow our example, this gives.
How to calculate your Customer Lifetime Value?
This means that some customers repeat their purchases during the year, or add new features to the service/product. So how do you calculate the Customer Lifetime Value in terms of turnover? Let’s go! You can now calculate the average Customer Lifetime Value of your buyers with this formula. A customer brings, on average, € 19,498.5 in turnover to the company. Calculate the CLV in terms of profit. If you want to get a more accurate value, you will need to subtract customer acquisition costs and retention costs. The aim is to identify the profit generated by each buyer. You will need to add these 2 indicators to the CLV formula: Customer acquisition cost. Budget spent on prospecting and marketing campaigns / Volume of new customers. The cost of customer retention. Cost of loyalty campaigns + Cost of after-sales service / Customer volume.
The formula for CLV in terms of profit is this: Average basket * Purchase frequency * Lifetime] – [(Customer acquisition cost + Customer retention cost) * Lifetime]. Let’s go back to the example above, specifying that the company spent: It should also be remembered that it has a portfolio of 100 clients, including 30 new buyers. The previous formulas allow you to establish an average on your current customer portfolio. Thanks to a marketing automation solution, you can apply the CLV formula in terms of profit for each of your customers. The interest? Identify buyers with above-average values to better target your marketing campaigns (more on this later!). Indeed, data collection via an automated tool helps you to. Identify the entry points and contact points of each customer: in other words, the campaign that enabled them to be acquired.