Measuring Customer Lifetime Value
Getting new customers can take a lot of courtship. You wine and dine them, so to speak, to get them to fall in love and eventually tell you they love you. Or at least buy your product or service.
It’s just not easy to acquire new customers. There are countless competitors in every sector of business, and ad costs are rising.
It’s expensive to implement tactics like content marketing and SEO, and even the most successful campaigns don’t see returns fast enough. So how on Earth are you supposed to increase your profits and grow your business?
By increasing the lifetime value of your existing customers.
The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value.
Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases.
The company must subtract from its expected revenues the expected costs of attracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between 10 percent and 20 percent, de-pending on cost of capital and risk attitudes). Lifetime value calculations for a product or service can add up to tens of thousands of dollars or even run to six figures.
And, here’s my take:
Customer lifetime value is the total amount of profit or revenue generated from a single customer over the lifespan of a business-to-consumer relationship.
For example, a specific customer that buys new products yearly will have a much higher lifetime value than someone who buys every two years.
Simple enough, right?
On top of that, the probability of selling to an existing customer is 60-70%, whereas selling to a new customer is much lower.
Focus on creating a smaller customer base that’s loyal and buys more often and you will get more revenue, faster.
Acquiring new customers is expensive because it takes tons of different tactics to get them to convert.
CLV calculations provide a formal quantitative framework for planning customer investment and help marketers adopt a long-term perspective. Many methods exist to measure CLV.
Case: Columbia's CLV
Columbia’s authorsDon Lehmann and Harvard’s Sunil Gupta illustrate their approach by calculating the CLV of 100 customers over a 10-year period (see Table 4.1).
In this example, the firm acquires 100 customers with an acquisition cost per customer of $40. Therefore, in year 0, it spends $4,000. Some of these customers defect each year. The present value of the profits from this co-hort of customers over 10 years is $13,286.52. The net CLV (after deducting acquisition costs) is $9,286.52, or $92.87 per customer
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