Calculating Your CLV | Why Every Business Owner Needs To Know This Number

[kc_heading_two size="40" color="#2521A6" align="left"]CLV=Customer Lifetime Value[/kc_heading_two]

The Customer Lifetime value is the estimated revenue that a customer will bring in during their lifetime. The infographic below was put together by Kissmetrics and it explains the concept of lifetime value, using the example of Starbucks.

Step 1: Get An Average of Your Variables

Step one is to determine your variables…The first step would be to calculate the average customer expenditure per visit. Next, calculate the average number of visits for every purchase cycle. In Starbucks’ case, the purchase cycle is one week. Multiply the above two figures to arrive at the average customer value per purchase cycle.  Some businesses might have a purchase cycle of 1 month or even  just once per year. You know how frequently your regular customers purchase from you and what the typical range or value of each purchase is.

Step 2: Calculate lifetime value

The next step would be to calculate the average customer lifespan or how long a person remains a customer. In the case of Starbucks, the average customer lifespan is 20 years. Another important constant is the customer retention rate, which is the percentage of customers who repurchase in a given period of time compared to the preceding period of time. Also determine the profit margin per customer, the rate of discount and average gross margin per customer lifespan.

The infographic provides three equations to calculate the lifetime value. After calculating the lifetime value using these equations, find out the average lifetime value.

Breaking down lifetime value

In most cases, you will calculate lifetime value by gathering or determining data from randomly chosen customers. However, it is important to note that the LTV will be different for different kinds of customers. For example, a customer in China would not have the same LTV as one in the U.S. Similarly, within the U.S., there may be wide variations. Different target markets or customers will exhibit different lifetimes and values data.

The calculation of LTVs across geographies or age groups will allow you to separate “good” customers from “bad” ones. The “good” ones are usually more profitable but they also may be more expensive to acquire.

Customer satisfaction boosts lifetime value

The concluding section of the infographic discusses the impact of customer satisfaction on lifetime value. Research has found out that increasing customer satisfaction by 5% can boost your profits by as much as 95%.

Do you know the lifetime value of your customers? How do you calculate the lifetime value? Are you purposeful about the customer experience. Do you have your customer experience roadmap? Or, have you mapped out the process of each purchase cycle for your customers. Is the experience good or bad? Is it accidental or purposeful? All must ask questions if you want to have a solid customer satisfaction level, or, better yet, raving fans.

Highlights of the infographic:

1. The customer retention rate at Starbucks is 75%.

2. The average lifetime value of a Starbucks customer is around US$ 14,000.

3. 62% of Starbucks customers are ‘Very Satisfied’; and another 27% are ‘Satisfied.’

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