How valuable is a customer to your business?
HOW DO YOU determine the value of a customer to your business? Do you give more attention to the customer who buys a big value item every five years or, the customer who religiously spends $50 at your business every week?
Furthermore, do you treat the customer who buys a vehicle from you twice in his lifetime better than you do the customer who services his vehicle at your business every few months, and buys all of his vehicle parts and supplies from your business throughout his lifetime?
In today’s article we focus on Customer Lifetime Value or (CLV).
Customer Lifetime Value is the average amount of money your customers will spend on your business over the entire life of your relationship. For example, if Ms Jack continues
to buy groceries at your supermarket for 50 years and spends $6,000 per year, her customer lifetime value is $300,000, minus any money you spent to acquire her as a customer.
Business Encyclopedia shares a very simple example that demonstrates the importance of the CLV data. “Imagine that you sell socks from an e-commerce store. You spend $5 in advertising to attract a customer. He or she buys an average of seven pairs of socks every year for 10 years. Your profit margin on each pair of socks is $10. “Based on this data, you profit $70 per year from the customer, which works out to $700 over the decade. You then subtract the amount of money you spent to acquire the customer, which results in a net customer lifetime value of $695.”
Knowing a customer’s lifetime value empowers to be more protective of that relationship. You can use the data to determine how much you can spend to acquire a similar customer and also to determine your most profitable types of customers.
If you haven’t started yet, we hope that you will begin to value each customer not for the worth of their daily transaction, but for their lifetime value. Each customer may be worth more than you think.
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