Jay Abraham, master of marketing said that one of the most valuable things any business owner can do is to calculate the marginal net worth of a new client or customer. The marginal net worth, or commonly referred to as “Client Lifetime Value” is quite possibly the most important metric in business.
Customer lifetime value (CLV) is the total worth to a business of a customer over the whole period of their relationship. The most basic way to determine CLV is to add up the revenue earned from a customer (annual revenue multiplied by the average customer lifespan). Additional inputs like referral value, upsell value, and acquisition costs can be factored into the value. This figure can also be calculated over a certain timeframe or within a segment of your customer base, but for simplicity’s sake, we’ll still with average customer value times lifespan.
Once you understand the dollar value of a new relationship, you can use this figure to guide your decisions and actions in business.
Here’s how your CLV figures can help you gain a competitive advantage and outsmart your competition.
Most business owners don’t have this calculation handy. The simple act of knowing this figure will allow you to break down the various components of CLV and employ specific strategies around pricing, sales, advertising, and customer retention with the goal of improving the number.
Driving more revenue from each new relationship can be achieved by either increasing the rate at which new buyers buy or increasing the average transaction with every new customer. While these strategies may not be viable for every industry, the following tactics can help you generate more value from each new customer.
Creating loyalty with customers and reducing churn rates represents the other half of the CLV equation. Maintaining customer relationships for longer periods of time allows you to drive more profits and increase marketing ROIs. Here’s how to increase customer loyalty:
CLV provides crucial insights for their customer success, product development, marketing, and pricing strategy. With the tactics mentioned above, you’ll be able to boost your CLV and keep your customers happy.