Your customer’s lifetime value (CLV) is a measurement of all of the value your business will derive from your entire relationship with the customer. This measurement will help your small business determine which customers are the most valuable.
Why is customer lifetime value important? It can help you make critical business decisions about marketing, sales, and more. This figure can be used when you are determining the amount of money you will be allocating to customer acquisition and customer retention. You can, for example, limit these costs based on a customer’s lifetime value.
Calculating Customer Lifetime Value
How do you actually calculate this figure? Below we will share one of the most basic methods for calculating customer value: simple LTV.
Simple Lifetime Value Calculation
One of the most basic methods for calculating customer value is the Simple LTV. Here are the values you will need to get started:
The average number of years a relationship with your small business lasts
The annual revenue per customer
The initial cost of customer acquisition
Once you have gathered these values, you can now calculate simple LTV with the following equation:
Annual Revenue Per Customer x Number of Years – Cost of Customer Acquisition
Armed with the lifetime value of your customers, you can now decide how much to spend to acquire them.
You can check out some other ways to calculate LTV here. Many small businesses will use one or a combination of these equations to calculate LTV.