How do I calculate Total Lifetime Value (TLV) of my customers?

How do I calculate Total Lifetime Value (TLV) of my customers?

Customer Lifetime Value (CLV) is a crucial metric for businesses seeking to enhance customer loyalty and improve company profitability. 

It shows the total money a company can earn from one customer throughout their time together. Understanding CLV is essential because it enables companies to make informed decisions regarding marketing strategies, customer retention efforts, and resource allocation.

Calculating CLV helps businesses effectively gain and retain customers. By knowing a customer’s potential value over their lifetime, a company can allocate marketing and sales resources more efficiently. This helps the company focus on gaining and keeping valuable customers who greatly impact its long-term income.

Moreover, CLV also aids in setting realistic budgetary goals for customer acquisition. Suppose the CLV calculation reveals that the average customer generates considerable revenue over time. The company might spend more on marketing to attract new customers.

If the customer lifetime value (CLV) is low, the company should focus on improving customer satisfaction. This will create loyalty, allowing the company to strengthen and extend customer relationships.

Several factors need to be considered when calculating CLV. The formula calculates the average purchase value, frequency, customer lifespan, and gross margin to understand customer value. The formula can be represented as:

CLV = (Average Purchase Value) x (Average Purchase Frequency) x (Customer Lifespan) x (Average Gross Margin)

Average Purchase Value refers to the average amount a customer spends on each transaction. Average Purchase Frequency represents how often a customer purchases within a given period. Customer Lifespan denotes the time a customer remains engaged with the company.

The Average Gross Margin is the money a business makes from a customer minus the costs of serving that customer. It shows how much profit a business makes from its sales.

Conclusion

Understanding Customer Lifetime Value (CLV) is important for businesses. It helps them improve their marketing efforts.

CLV also allows companies to customize customer experiences. This leads to increased customer loyalty. As a result, businesses can achieve higher profits and long-term growth.

Author
Picture of Paul Bichsel
Paul Bichsel
Paul is our Team Leader and SuccessCX Director. Absolutely focused on the human elements of customer experience and dedicated to his family. He revels in nothing more than a cheeky win in a game of Uno. Paul believes ‘the best time to do something, is now’ unless it cuts into his morning coffee and wordle session.
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