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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Leanne Hoagland Smith
Are your sales where you want them to be? Will you be one of the few who achieves sales success or one of the many who have failed to change? So what are you doing to change those results? Let’s be honest, with companies moving globally and at lightening speeds, the traditional business solutions are outdated and dead. My approach moves your business out of its comfort zone and secures your competitive advantage now. If you are seeking to increase sales, build customer loyalty, create a culture of great attitudes or just achieve some sleep filled nights, then we should talk because my clients have experienced exactly those types of results. Learn more about customer loyalty at http://www.processspecialist.com/customer-loyalty.htm Give me a call at 219.759.5601 for a free strategy session. P.S. If you are seeking a motivational speaker, sales trainer or small business expert that will leave your audience smiling and remembering, please feel free to contact me at 219.759.5601. - Visit Leanne Hoagland Smith's Website |
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John Brennan
(Visit John's Website)
John Brennan Ed.D.
Dr. Brennan is President of Interpersonal
Development, LLC, a training and
development firm. Interpersonal
Development has provided sales training
and coaching to more than 3,000 sales reps
from over 100 companies.
A native of Australia, Dr. Brennan
received his doctorate from the University
of Rochester. His dissertation researched
the effectiveness of Behavioral Modeling
Technology in training people in
interpersonal skills. While he has spent
most of his career designing or delivering
training, he was also a Vice-President of
Sales of a training and development
franchise with operations in 25 markets.
Dr. Brennan has designed and delivered
sales training in North America, Asia,
Europe, Australia and the Middle East. He
has been a guest speaker at numerous
national and regional professional
conferences.
When Microsoft wanted Best Practices
articles on sales for their web site, they
called Dr. Brennan. The results are at office.microsoft.com/e
n-us/FX011387391033.aspx
His firm’s clients have included Volvo,
The Prudential, Merrill Lynch, Eastman
Kodak, Gannett, Equifax Europe, the
Economist Group and countless small
businesses.
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