Many businesses today have a marketing strategy that looks to maximize immediate conversions. However, you should also consider what a customer’s value over time is. When you look at your customers as lifelong buyers of your products or services, you shift the way you look at them. This also changes your marketing strategy, so you can consider the profit they will net you over time.
So what exactly is customer lifetime value (CLV)? To put it simply, CLV measures how valuable a customer is for your business over the course of a lifetime, not just a single purchase. The lifetime of a customer is usually considered to be 12-24 months. During this time period, you will monitor how much money they spend on what you sell, deducting the expenses you had of getting them to become customers.
Using this metric will enable you to understand what a reasonable cost would be to obtain a customer. This is one of the most important factors in understanding how successful your business will be, both right now and in the future. Businesses often forget about this metric, even though it can be incredibly beneficial for them. That is because it can precisely determine what a given customer is worth over time. When you know what the customer lifetime value is, you will understand how much profit a customer will net you.
Why CLV is Important
Not all customers are going to be returning to you again and again, netting you more profit. Some customers will buy something from you once and never return. A majority of the customers a business has are one-time customers. The majority of profit most businesses make comes from a small percentage of the total customer base.
Those returning customers will often keep buying your products and services, for years. When you estimate the CLV for these customers, you get to see just how valuable they are to your business, which will help you tweak your marketing strategy.
You can place more emphasis on marketing to these customers, since they are your biggest fans and will gladly buy from you when you focus on them.Although it is usually difficult to calculate, CLV is a very useful metric for any business. By calculating customer lifetime value, you get a keen insight into how frequently your customers will be making purchases, as well as when they will cease buying from you.