Every marketer knows that success can be measured. The question is simply how to measure it. Some marketers claim that the break-even analysis is the perfect identifier of profitability and sustainable growth. Others claim that year-to-year trend analysis is best. Still others prefer alternate miscellaneous data points.
There are so many difference ways to measure success, how can you know which metric is the most accurate and most useful? For decades, major corporations have been using customer lifetime value (CLV) as a primary marketing measurement.
While they do track a wide variety of other measures, customer lifetime value is at the top of the list. Only recently have smaller businesses began to realize the power of this important metric.
So what is customer lifetime value and what does it tell you? In a few words, it is the total amount of money that a typical customer will spend on your brand over the course of the customer’s life.
Knowing the exact amount of money that a customers is going to spend on your brand is better than gold.
Calculating Customer Lifetime Value
In order to reap the benefits, we must suffer a little pain. That’s a popular saying in the locker rooms of many sport’s teams. That should also be the slogan of every marketing department.
Calculating and interpreting metrics is not easy. Sometimes it’s more difficult than it really should be. Of course there are tools and software that we can use to calculate the numbers but that doesn’t help with interpreting what those numbers mean. It can be down-right painful sometimes when dealing with measures and metrics.
That is, until we start using customer lifetime value.
Customer lifetime value is one of the easiest measures to calculate and interpret. Interpreting is really easy. The higher the number, the better. Calculating is almost that easy. There are only four things that go into figure out how much money a typical customer will spend over the course of his or her life.
- Average Customer Expenditures per Visit – This is the average amount that a typical customer spends each time he or she makes a purchase. Some customers will spend more than other so we use the average. You can calculate this number by taking your annual gross sales and dividing it by the total number of customer visits for that year. This will give you the average expenditures per visit for that year. Most accounting software can query this information in just a few minutes. For our example, we will give this a value of $12.73 per visit.
- Average Customer Visits per Week – This is known as the purchase cycle. It is the average number of times a typical customer will purchase from you in any given week. Some customers will visit more than others so we will use the average. You can calculate this number by taking the total number of customer visits per week and dividing it by the total number of customers that visited that week. Again, most accounting software can query this information for you. For our example, we will give this a value of 3 visits per week.
- Average Customer Value per Week – This is the amount that a typical customer will spend each and every week on your brand. We will use the two numbers that we just calculated above. Take the average customer expenditures per visit and multiple that times the average customer visits per week. For our example, we will call this variable a and will have a value of $38.19 per week as calculated using the variables above.
- Lifespan of Customer – This is the total number of years that a typical personal will remain an active customer of your brand. Each business has a different lifespan of customer. For our example, let’s call this variable t and give it a value of 15 years.
Using the variables above, we calculate customer lifetime value like this:
52(a) Χ t
Yeah, it really is that simple. Take average customer value per week (value a) and multiply it by 52 weeks to get an annual value. Then multiply that number by the lifespan of customer (value t) to get customer lifetime value. In practice it would look like this (using the values assigned above):
52($38.19) Χ 15 = $29,788.20
That’s 52 weeks per year multiplied by $38.19 per week. That total is then multiplied by 15 years which gives your $29,788.20 spent on your brand by a typical customer over the course of his or her life.
This is the easiest and most straight forward method for calculating customer lifetime value but it is important to note that there are other methods that are more complicated and potentially more accurate.
However, those methods are best reserved for corporate conglomerates with scores of accountants and statisticians whose sole purpose is to calculate metrics.But for startups and small business, this method is the best to use.
Using customer lifetime value is the best measure for successful marketing campaigns.