Lifetime Customer Value and Why It Matters For Your Business
As a business owner, you’ll understandably want to do everything in your power to retain your existing customers and acquire new ones – all without overspending.
But it can be tough to know how to accomplish that goal (or even determine where you are in the process).
Tracking metrics is one of the easiest ways to assess where you are, where you’re going, and how you’re going to get there. However, you may be confused as to which metrics matter the most.
Arguably, lifetime customer value should be high on your list of important metrics. Let’s take a closer look at why this metric matters so much and how to calculate it for yourself.
What is Lifetime Customer Value?
First and foremost, we need to define lifetime customer value. Also written as customer lifetime value or abbreviated as LCV, LVC, or LTCV, this refers to how much money a given customer is likely to spend with your business over the course of your relationship (or how much money a single customer will generate during the “lifetime” of their patronage of your business).
Why is Lifetime Customer Value Important?
There are a few different benefits of keeping tabs on your lifetime customer value.
For one thing, you’ll be in a better position to anticipate and reduce customer churn. The longer a customer spends with your business, the higher their lifetime customer value will probably be. Since it’s also more cost-effective to retain an existing customer than to acquire a new one, you’ll want to pay attention to this metric and make adjustments in order to keep customers around for longer periods of time.
Once you know how much a customer is likely to spend (and how long they’re likely to stick around), you can make smarter business decisions. It doesn’t make a whole lot of sense to sink a lot of time into nurturing a customer relationship that won’t flourish. But if you have data to suggest that a customer will spend more time and money with you (barring an unforeseen event), you’ll want to devote additional resources to that customer to retain their business.
Having a handle on your current lifetime customer value can also help you target the right audience. If you know that your LVC is lower than you’d like it to be, it’s possible you’re getting a lot of customers that aren’t in it for the long haul. To improve your LVC, you may want to adjust your marketing and sales processes to reach those who will spend more over a longer period of time.
High customer churn rates are the enemy of business growth. Knowing as much as you can about your customer lifetime value can help you to reduce churn, attract the right clientele, and grow your business in the long term.
How is Lifetime Customer Value Calculated?
Now that you understand the importance of lifetime customer value, you might be wondering how to measure it as it relates to your business.
There are a number of calculations you can use to measure LCV, with some being more complicated than others. With any of these formulas, you’ll need to know certain values – like your churn rate, the average customer lifespan, the number of new customers you acquire each month, the average or median invoice, and your marketing and sales costs. You can then multiply or divide these values according to the particular formula to estimate your lifetime customer value.
But the easiest way to assess this metric is to use a free LVC calculator. After you plug in just a few numbers, an LVC calculator will automatically equate your lifetime customer value for you.
That will minimize the manual work you’re required to do and leave you with a strong idea of how much your average customer is worth to your business right now. From there, you’ll discover where you’re overinvesting (or underinvesting) in your business and whether your customers are actually helping you to grow over time.
Ultimately, lifetime customer value is just one metric that you’ll want to track if you’re looking to grow your business. Knowing how to properly measure this metric and make adjustments as needed will help you maximize your success in the future.