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7 Reasons Why You Should Know Your Customer Lifetime Value (CLV)

Echo3 | 1 May 2020
7 Reasons Why You Should Know Your Customer Lifetime Value (CLV)

The truth is your customers aren’t only worth the amount of money they spend on your business today. Each new customer also has a future value which keeps your business alive and growing.

Not sure what you Customer Lifetime Value is?

Simply put, your CLV is an indication of the total amount of business your customers will bring you over the entire lifetime of your relationship with them.

For instance, if a customer spends $100 with you and continues to buy products or services from your business for 5 years spending $100 per year, his or her individual customer lifetime value is $600. If this customer refers another customer to you, then this doubles to $1,200.

We’ve put together a easy-to-use CLV calculator to help you work this out for yourself. Try it out – most everyone who has used it has been pleasantly surprised!

Why is knowing your CLV so important?

Well, it really is the starting point for developing your marketing strategy and how much you should spend to acquire new customers!

So without further ado, here are 7 reasons why you should know your Customer Lifetime Value:

1. You could be undervaluing your customers

The danger of defining your customer value to a single purchase would be to undervalue them. This plays out in how much you’re prepared to spend to acquire a new customer.

If your competitors know their CLV and you're a bit sketchy on yours, they might be prepared to spend more on adverts to gain that customers attention, knocking you out the bidding race. Try out our free CLV calculator here.

2. Underserving or overserving?

When you undervalue the customer, you're probably in danger of underserving them as well. After all, why love-up on a customer that’s only worth the initial sale amount?

We may even go one step worse, and forget to serve them all-together after the initial sale. Face-palm. Don't feel bad if this is you. It's a common problem!

Unfortunately, this approach creates a business stuck in hunting mode. Always hungry and never sure where the next meal is coming from. Hunting down new customers will always be more costly than optimising your existing customer base.

Bear in mind that you could also be overserving a customer with a low CLV making them unprofitable in the long run, so tracking your CLV is a smart move.

3. Define your budgets, target and focus on valuable customers

Armed with the knowledge of each customer’s lifetime value, you gain a clearer sense of how much you should be spending on customer acquisition and customer retention. No more second-guessing.

You may even have different CLVs for each of your services or products. Our free CLV calculator allows you to calculate these separately. Knowing these allows you to focus your marketing budgets on the most profitable product or service in your suite.

When you know the facts, you can attract the right kind of leads and prioritise your ad spend on truly profitable customers.

These magical unicorns are the type of customer you can count on as repeat purchasers and brand ambassadors... every successful business has them.

4. Be a business built for growth.

Embedding customer satisfaction and repeat business into your processes changes your business model to one that is built for growth instead of single sales. Knowing your CLV is the very first step in that revolution because, by its very nature, it has a long-term view.

It puts a value on repeat business, referrals and relationship building which will see your business grow year after year.

5. Get a snapshot of your business’ financial health

Every business is aiming for a high customer lifetime value and a lower cost to acquire that customer. The larger the difference, the more profitable the relationship is.

When you know your CLV:CAC (customer acquisition cost) ratio you can start to optimise the ratio to grow your business at a healthy rate.

6. Improve, improve, improve!

Decreasing customer churn is always a good goal as the lower the turnover, the better you and your team are meeting expectations and engaging customers.

That’s a useful insight on the quality of your products and services and a good indication of the strength of your business.

When you make customer relationship a priority, you go into listening mode. If you have a low CLV, you can gather feedback on how you can improve.

In listening mode, you get to know your audience better and your product or services will automatically improve.

7. Protect your profitability

Usually, customers you acquire through one-off promotional means have a low CLV.

They’re in it for the short-haul and won’t pay full price for your products and services. High CLV customers are loyal to your brand, with or without the discounts, and make positive contributions to your margins through their full-price purchases.

You can also dedicate your resources better toward long-term customers, which results in increased profits.

Ready to find out your CLV?

Use our free calculator that takes referrals into account!

How much should I spend on marketing?