Calculating Customer Lifetime Value
Calculating Customer Lifetime Value
• Acquisition: You'll have a better understanding of what you can spend to acquire customers.
• Targeting: You'll know which customer segment delivers the most profit to your company and you can focus more marketing efforts toward that segment.
• Return on investment: By using CLV in your ROI calculations for marketing campaigns, you'll have a much more accurate measure of campaign performance.
• Customer retention: You can determine how much you can spend to profitably retain customers.
• Single-customer profitability: You can calculate the profitability of an individual customer.
CLV becomes more important as your marketing budget rises and your customer base grows. Yet even an early-stage company can benefit with a simple CLV estimate.
Before you begin you'll want to look at CLV for different groups of customers, so make sure you've defined those segments. CLV is a valuable tool to improve your marketing campaigns and budget; it's also used when you're working on customer retention and ROI.
There are several figures you'll need for your CLV calculations:
• Cost of goods sold (COGS): the cost to physically produce a product or service
• Gross profit: the difference between the price of your product and the COGS
The CLV calculation is most valuable when you measure it by customer segment - similar groups of customers who use your products/services in a similar way. For each segment, determine how long an average customer stays with you -- the "lifetime". Look at your customers' buying patterns and calculate the total number of purchases they make and the time between those purchases.
To calculate the CLV for each customer segment, estimate how many purchases you think an average customer will make before the relationship ends (the customer no longer buys from you). Then estimate the average length of time between purchases (in days), the average revenue per purchase and the gross profit margin for the revenue generated by these customers (as a % of revenue).
The Net Present Value (NPV) is the value of a future stream of cash flows in today's dollars. In general, it's better to have a given amount of money today than tomorrow. If you have it today, you can invest it and earn a return. If you don't have it until tomorrow, you miss the chance to invest, and inflation may also eat away at its value.
EXAMPLE: If you were offered $5000 a year from today, how much would you take if you could have it today instead? Would you take $4500 if you could have it today instead? $4,800? $4,000? The amount you're willing to take today is the Net Present Value (NPV) of the $5,000.
It's important to calculate NPV to prevent overspending on marketing and/or operations. If you think a customer will spend $10,000 a year with you for three years, that customer isn't worth $30,000 because that $10,000 in years two and three is actually worth less than $10,000 today. Calculating NPV will give you a more accurate value for the customer.
Calculating Customer Lifetime Value - To learn more about this author, visit John Brennan's Website.
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When you know your CLV, you have an extremely powerful tool that helps with:
• Acquisition: You'll have a better understanding of what you can spend to acquire customers.
• Targeting: You'll know which customer segment delivers the most profit to your company and you can focus more marketing efforts toward that segment.
• Return on investment: By using CLV in your ROI calculations for marketing campaigns, you'll have a much more accurate measure of campaign performance.
• Customer retention: You can determine how much you can spend to profitably retain customers.
• Single-customer profitability: You can calculate the profitability of an individual customer.
CLV becomes more important as your marketing budget rises and your customer base grows. Yet even an early-stage company can benefit with a simple CLV estimate.
Before you begin you'll want to look at CLV for different groups of customers, so make sure you've defined those segments. CLV is a valuable tool to improve your marketing campaigns and budget; it's also used when you're working on customer retention and ROI.
There are several figures you'll need for your CLV calculations:
• Cost of goods sold (COGS): the cost to physically produce a product or service
• Gross profit: the difference between the price of your product and the COGS
The CLV calculation is most valuable when you measure it by customer segment - similar groups of customers who use your products/services in a similar way. For each segment, determine how long an average customer stays with you -- the "lifetime". Look at your customers' buying patterns and calculate the total number of purchases they make and the time between those purchases.
To calculate the CLV for each customer segment, estimate how many purchases you think an average customer will make before the relationship ends (the customer no longer buys from you). Then estimate the average length of time between purchases (in days), the average revenue per purchase and the gross profit margin for the revenue generated by these customers (as a % of revenue).
The Net Present Value (NPV) is the value of a future stream of cash flows in today's dollars. In general, it's better to have a given amount of money today than tomorrow. If you have it today, you can invest it and earn a return. If you don't have it until tomorrow, you miss the chance to invest, and inflation may also eat away at its value.
EXAMPLE: If you were offered $5000 a year from today, how much would you take if you could have it today instead? Would you take $4500 if you could have it today instead? $4,800? $4,000? The amount you're willing to take today is the Net Present Value (NPV) of the $5,000.
It's important to calculate NPV to prevent overspending on marketing and/or operations. If you think a customer will spend $10,000 a year with you for three years, that customer isn't worth $30,000 because that $10,000 in years two and three is actually worth less than $10,000 today. Calculating NPV will give you a more accurate value for the customer.
Calculating Customer Lifetime Value - To learn more about this author, visit John Brennan's Website.
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Linda RichardsonLinda Richardson is the Founder and Executive Chairwoman of Richardson, a global sales training and performance improvement company. As a recognized leader in the industry, she has won the coveted Stevie Award for Lifetime Achievement in Sales Excellence and she was identified by Training Industry, Inc. as one of the “Top 20 Most Influential Training Professionals.” Ms. Richardson is credited with the movement to Consultative Selling and is the author of ten books on selling and sales management, including Sales Coaching — Making the Great Leap from Sales Manager to Sales Coach, and Stop Telling, Start Selling. She teaches sales and management at the Wharton Graduate School of the University of Pennsylvania and the Wharton Executive Development Center. Linda is a frequent speaker at industry and client conferences, has been published extensively in industry and training journals, and has been featured in numerous publications, including The Wall Street Journal, Forbes, Nation’s Business, Selling Power, Success, and The Conference Board Magazine. Learn more about Richardson's sales training and performance improvement solutions at http://www.richardson.com web - Visit Linda Richardson's Website |
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David AchesonDavid Acheson is the founder of DCJA Consultancy. DCJA Consultancy is a management consultancy business specialising in B2B sales consultancy. They offer bespoke and packaged sales consultancy including Sales Optimisation Review, Interim Sales Management, Sales & Marketing Review, 1:1 Sales & Management Staff Analysis, Management Training, Solution Sales Training, Creation of New Pay Plan, KPI's, run Customer Feedback Campaigns, assist with Recruitment, Coaching, Appraisals and set up Strategic Marketing Campaigns. David spent his early career in accountancy and then moved into sales in 1982, working in Office Equipment, IT, Advertising, Training, Outsourcing and Consultancy. He has held many Senior Positions in SMBs and Global Organisations including Head of Sales Operations & Head of Business Development. His knowledge, skills and great experience of the Sales Industry has led to David making keynote speeches and running educational sessions to key businesses through organisations including The Chamber of Commerce and Business Link. - Visit David Acheson's Website |
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