Customer Lifetime Value: Is That Customer Really Worth It?
Customer Lifetime Value is a metric that is crucial in determining the ROI of marketing costs. There is a finite amount of cash for small business marketing and you really need to know if there is a payback on marketing.
In simplest terms, if you spend $3,000 on marketing/sales and get 10 new customers it costs $300 to acquire each new customer. This is the customer acquisition cost.
Customer Acquisition Cost without any context is not a useful metric for small business marketing. It is like confusing Cash Flow with Revenue or Profit. Determining Customer Lifetime Value allows you to place context around acquisition costs.
Customer Lifetime Value = (Revenue - Gross margin).
For detailed instructions, you may want to download our FREE Ebook Marketing Metrics Every Business Owner Needs To Understand.
The determination of Customer Lifetime Value provides clarity past the initial sale. You spend $1,000 on Google AdWords and you generate $2,000 in revenue. This looks like a great ROI on ad spend. It may appear that you simply subtract Ad spend from Revenue and you made $1,000.
Customer Lifetime Value takes you past this simple calculation and forces you to look at Gross Margin. This will include overhead expenses. It is also beneficial to break down Customer Lifetime Value into the various acquisition channels. Not every customer behaves the same. Look at Organic vs Paid channels and customer lifetime value. Is a specific channel bringing you once and done customers?
Do organic customers have a better lifetime value than customers from paid advertising?
What organic content provides the best customer lifetime value? Which paid channel provides the best value?
This can all seem a bit overwhelming so we created an Ebook that will step you through this process.
Here is some more information on How to Calculate Customer Lifetime Value from Clint Fontanella.
Customer lifetime value (CLTV) is one of the most important metrics to measure at any growing company. By measuring CLTV in relation to cost of customer acquisition (CAC), companies can measure how long it takes to recoup the investment required to earn a new customer -- such as the cost of sales and marketing.
If you want your business to acquire and retain highly valuable customers, then it's essential that your team learns what customer lifetime value is and how to calculate it.
Customer lifetime value is the metric that indicates the total revenue a business can reasonably expect from a single customer account. It considers a customer's revenue value, and compares that number to the company's predicted customer lifespan. Businesses use this metric to identify significant customer segments that are the most valuable to the company.
CLTV tells companies how much revenue they can expect one customer to generate over the course of the business relationship. The longer a customer continues to purchase from a company, the greater their lifetime value becomes.
This is something that customer support and success teams have direct influence over during the customer's journey. Customer support reps and customer success managers play key roles in solving problems and offering recommendations that influence customers to stay loyal to a company -- or to churn.
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