Have you ever measured Customer Lifetime Value (CLV) in a year? Calculating CLV is very important in company revenue planning. It will help you to adjust between the company’s sales target and the purchasing power of each customer.
Customer purchasing power certainly depends on the type of product they consume. If the product runs out, there is a possibility that the customer will make a repeat purchase. This transaction behavior will be an indicator of how the company measures CLV.
Before measuring CLV, understanding the definition of Customer Lifetime Value will greatly help you to better understand customer behavior. Through this article, you will not only learn what Customer Lifetime Value is , but you will also learn how to increase it.
Other Readings: What is Objective Key Results (OKR)? Definition, Benefits, and Examples
What is Customer Lifetime Value ?
customer lifetime value (CLV)
Customer Lifetime Value (CLV) is a measure that indicates how valuable a customer is to a company. This statistical indicator certainly does not just measure each purchase to another purchase, CLV also functions to find out the relationship that occurs on the purchase.
The entirety of a customer’s purchase complete with the relationship that occurs over a period of time is certainly very important for business growth. This also recent mobile phone number list has to do with cost efficiency in generating sales.
CLV is an important metric because it can encourage companies to retain customers to make subsequent transactions. This will certainly save more sales costs than you looking for new customers.
By continuously tracking CLV and including it in the Key Performance Indicator , it will be easier for the company to increase growth with existing customers. This metric will also be a source of information to determine management strategies to acquire new customers. Ultimately, the company is able to maintain or even increase its profit margin.
Further Reading: 5 Most Important Digital Marketing KPIs for Business
How to Measure CLV
Now you have realized that CLV is very important to support business growth. To calculate it, you also need to know that CLV has two different purposes, namely historical CLV and predictive CLV.
Historical CLV is the sum of all the company’s profits from previous customers. You can calculate it using existing customer data over a certain period.
While predictive CLV is a metric to predict how much revenue a company will earn during its relationship with a customer. This formula is certainly the right choice to measure CLV as a whole.
When using predictive CLV it means that you are trying to project the company’s revenue using existing customer data to estimate how the customer value will grow over time.
To calculate CLV, you will use data in the form of customer retention rate , customer lifespan, customer chrun rate , and average profit from each customer. Some of these data can be calculated using these two formulas:
Simple Formula for Customer Lifetime Value
CLV = (Annual revenue per customer * Customer relationship in years) – Customer acquisition cost
For example, a hosting service provider earns Rp1 million per customer over a period of 5 years. Meanwhile, the company spends Rp500 thousand to bring in each customer.
CLV = (Rp 1,000,000 x 5) – Rp 500,000 = Rp 4,500,000
The use of this formula is suitable for companies that provide products on a subscription basis. Do other types of products require a different formula? Of course. That’s why you need to know the next CLV formula.
Rumus Customer Lifetime Value
In this CLV formula, you will use the customer retention rate to calculate it. It is undeniable that companies definitely face risks when customers bagaimana untuk menyediakan struktur top buying, either using other products or no longer needing the products we offer. This is important for companies to track and try to find strategies to control the retention rate.
The higher the customer retention rate, of course it will benefit the company because it has the potential to continue to generate income. A high retention rate certainly also has the potential to reduce customer acquisition costs so that the profit level from each customer will grow or stabilize.
To calculate it, you can use the following CLV formula :
CLV = [(CR ratio -C ratio )xR ratio / (1+d) ratio ] – AC
Information:
CLV = Customer Lifetime Value
CR = Customer Rate
C = Customer Cost
d = Discount Rate
AC = Acquisition Rate
Tips to Increase Customer Lifetime Value
Companies need continuous customer growth so that sustainable profit increases are achieved. In order to achieve this, strategies to increase Customer Lifetime Value must be implemented to maintain current customers and get new customers.
Existing customers will bring the company to gain profit stability. On the other hand, increasing new customers has the potential to increase profits over a certain period.
The following tips for increasing CLV are very important for companies to maintain and increase customer value:
Creating a Program to Increase Customer Loyalty
Previously we used the example of a hosting company , the same analogy can be used to explain a customer loyalty program. Starting from the pain point of each customer, we can take the limitations of website users’ skills to manage content.
The program is certainly right if it can be aob directory placed according to the user’s skill level so that it is more targeted. In the long run, this will have an impact on improving the company’s relationship with customers.
Improving Customer Relationship Management
Interestingly, in dealing with customers, companies can increase CLV and bring in new customers. This is based on customer satisfaction so that they are willing to recommend products or services they have previously used.
Moreover, you can direct customers to become marketing partners, such as offering affiliate programs. This strategy works effectively in digital-based companies, including e-commerce companies .
Targeting Potential Customers
Each customer certainly has different behaviors and values to generate profits. Because of these differences, you should start choosing which customers have the potential to generate the most revenue.
For example, a hosting company finds that UMKM owners need special services in managing websites due to limited human resources. Of course, by offering a company profile website creation package, they will be more accepted. Moreover, the company offers search engine optimization (SEO) services , which will certainly increase customer value, thus generating new revenue ‘taps’.
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