Businesses tend to think that the more customers the better. Mostly this is true. Of course, I wouldn’t normally advocate for cutting someone out of your retail business, but there are many cases where you don’t want to encourage a customer to come into your store or virtual business in the first place. So part of CRM (Customer Relationship Management) involves targeting not the customers that are too expensive to serve, but looking at building relationships with the customers that do offer a profit to keep them coming back. This is the concept of Customer Lifetime Value (CLV), and sometimes involves charging certain customers more than they should for the same service, or imposing rules to ruce your cost of serving these unwant customers.
So, what is CLV?
CLV measures the value of Customers based to your company over an unrestrict time frame, not just the first purchase. This metric helps you understand how much you should reasonably spend per purchase.
In practice, CLV involves estimating the profitability of a customer over time bas on past behavior, including the customer’s average order value (AOV), the average length of time a customer like this continues to buy your product, and how much it costs to serve the customer (such as discounts to facilitate sales, customer service costs, free products they receiv, etc.) There is a financing component to this, which represents the fact that future payments are less valuable than current payments due to inflation (call net present value or NPV), but don’t worry too much about this as it doesn’t have a huge impact on our discussion today.
What the CLV calculation means
Customers based helps you determine not only how much you should spend to acquire a customer, but also how much you’re willing to spend on an ongoing basis to keep them.
The premise behind this concept is check out more info here about are creat equal. Whether or not you’ve put this concept into practice in your practice, you probably already have a basic understanding of this.
For example, one customer might come in and buy $300 of merchandise, while another might come in, ask a lot of questions, take up a lot of your time, question the price, devalue the quality, and only spend $8.95. The first customer is valuable, while the second customer may be a net loss to the company because they consume a lot of your resources, create frustration (which may mean the customer contact doesn’t serve the next customer either), and then don’t really buy anything.
Calculating Customer Value
Often, companies look at internal sales data to segment material data into groups bas on their purchasing behavior. I gave a great talk on market segmentation yesterday if you ne help getting start.
In your database you ne the average sales, number of transactions and retention period for a given customer (see the figure below for how this information is us when calculating LTV). With this information you can calculate the Customer Lifetime Value for a single customer using the LTV and the profit margin for such customers, which is the difference between the profit you make (after ducting product costs, discounts, etc.) and the costs, such as shipping (if free), free products, customer support, marketing expenses, etc.
