Lifetime Customer Value (LCV), also known as Customer Lifetime Value (CLV), is a metric that helps you, as a marketer, to understand the total worth of a customer to your business. By focusing on LCV, you can make better-informed decisions on allocating resources effectively, enhancing customer relationships, and driving long-term profitability.
How to Calculate Lifetime Customer Value
Lifetime Customer Value is a projection of the total revenue you can expect from a single customer throughout their relationship with you. It encompasses all purchases made by the customer and considers the profitability of those purchases.
How you calculate LCV can vary depending on the business model and desired detail level. Here is a simplified formula to get you started:
LCV = (Average Purchase Value) x (Number of Purchases per Year) x (Customer Lifespan in Years)
That doesn’t sound so bad, right? Calculating LCV has a lot of benefits, including:
1. Better resource allocation. By knowing the LCV, you can focus on acquiring high-value customers and invest in retention strategies that maximize long-term profitability.
2. Better customer segmentation: LCV helps identify customer segments based on their value. This allows you to tailor your marketing efforts to high-value segments using personalized offers and services.
3. More accurate marketing ROI: This ensures your marketing budget is spent efficiently in acquiring and retaining profitable customers.
4. Better strategic planning: LCV helps you forecast revenue, identify growth opportunities, and make data-driven decisions.
5. Competitive advantage: Companies that leverage LCV can gain a competitive edge by understanding their customers better and delivering superior value.
Real-Life Example
What might this look like in real life? Consider a subscription-based streaming service. By calculating the LCV of their subscribers, the company can determine how much to spend on marketing to acquire new subscribers. For instance, if the average subscriber pays $10 per month and stays subscribed for three years, the LCV would be:
LCV = $10 x 12 x 3 = $360
This information helps the company decide on a budget for acquisition costs, ensuring that they spend less than $360 to acquire a new subscriber, thus maintaining profitability.
What difference can knowing LCV make for your marketing?
