It’s a known fact that it costs more money to acquire a new customer than it is to serve an existing one. In fact, customer acquisition tactics cost 6 to 7 times more than customer retention tactics on average.
Customer lifetime value refers to the amount of money a customer spends with you over the amount of time they do business with you.
How To Calculate Customer Lifetime Value
Finding the lifetime value of your customers is rather simple if you know your numbers. You can calculate customer lifetime value by multiplying the average order value by the average number of orders by the average lifetime of a customer.
Customer Lifetime Value (CLV) = Average Order Value (AOV) X # of Orders Per Year X # of Years a Customer Buys
$100 AOV x 3 orders x 2 years = $600 CLV
Make sure you pick a set time period when attempting to do these calculations.
Why Does Customer Lifetime Value Matter?
There’s a limited amount of people in the world, about 7 billion. Of the total population, only a fraction will be in your target audience and a fraction of those people will end up being a paying customer.
Then consider the fact that they have limited resources. I’ve yet to meet a person with endless money.
Knowing this, smart business owners aim to create amazing customer experience in an effort to extend the relationship and increase the number of times a customer does business with them.
Let me ask you…
Which would you rather have:
500 Customers that spend $100 with you over the course of a year? OR 100 customers that spend $100 with you for the next 10 years?
If you picked the first option, then I’d be inclined to think you failed math in school because you’re bad with numbers.
While may have more customers, your success is short lived. As an entrepreneur, you should be building your business with longevity in mind. This is your livelihood.
You may only have 100 customers with the latter option, but that’s a certified business with a predictable revenue stream. And that’s sexy…
They’ve stayed with you for 10 years which is rare for most businesses.
Increasing your customer lifetime value matters because it creates a more sustainable business over time.
Fostering customer loyalty increases the lifetime value of your customers. That’s why I’m such a big fan of email marketing; it’s the perfect tool for building the trust you need to create long-lasting relationships with your customers.