How to Calculate Customer Lifetime Value

by | October 11, 2019

Entrepreneurs have different aims when starting or keeping a successful online business. But it is all combined and could not last without each other. They all want more traffic, more awareness, more customers. And they all want that so they can convert it into profit. If you are one of them, you know that you need traffic because you want more customers, you need awareness… because you want more customers. In the end, you want those customers to stay with you for as long as possible.

This “as long as possible” is actually your customer lifetime. But how to calculate customer lifetime value and what to expect when doing it? Here are these and more answers.

What is Customer Lifetime Value?

Let’s start with the customer lifetime. As mentioned in the beginning, that period is the time your customers spend as such. For example, you are selling services, and they can pay for an annual subscription.

But this period might change according to the progress of your services. It could become a customer lifetime of two years or more. And once you understand the lifetime value, you will be able to determine how much you’re willing to pay for growing the cycle.

Each customer is essential for your business, and we are sure you already know that. But the benefits that come with each of your trusted audiences are imperative and, in a way, different. Some might help you increase brand awareness. Others will endorse your work and make you look good. The third will help you build a trustful bond with them, and so on, and so on.

But those that you will find most helpful for your success are the ones that stay. They pay and stay with you.

How to Calculate Customer Lifetime Value?

It’s hard to ignore the math, but basically, you need to calculate the average purchase value, then multiply that number by the average purchase frequency rate and then you can determine your customer value. Once you calculate average customer lifespan, you can multiply that by customer value to determine customer lifetime value.

Yeah, it sounds messy, doesn’t it? Let’s break it down, step-by-step to understand it better.
1. Calculate your average sale and profit.
2. Determine the average number of sales, transactions, renewals, etc. you can expect over some period if you keep your customers happy
3. Multiply those numbers together, and then multiply that by the average customer lifetime.
Then you’ll know what’s the customer lifetime value you need to keep in mind.

What to Do with These Numbers?

Well, increase! That’s the end goal. All of those benefits we shared, in the beginning, are actually great ways for you to increase not only your sales but the lifetime value your customers have.

This means improving customer service for starters. Let them have a great experience on your website and while using your services or buying your products.

Take care of them as you solve problems they might have, suggest solutions, fix what needs to be fixed. Be always there as a support and make sure the friendly tone is also a priority.

Read reviews and listen to what they have to say because your customers’ insights can raise your awareness of what you need to improve.

Find a way always to inspire and surprise them. Give them something extra that’s not too much for you but enough for them.

Always look for ways to improve your business and never settle once you start growing. Quite the opposite, it’s the time when you need to mobilize your company and skyrocket it, instead of just keeping it up. This will help you not only enjoy excellent customer lifetime value but also looking at numbers that just go up.

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To Sum Up

Learning how to calculate customer lifetime value is just a way of learning how to increase your profits, be more successful, and improve everything that needs to be improved in your business. Following the insights, you get while taking this measure into account will lead to having to make necessary adjustments but it is mandatory if you want to reach your business goals.

The higher you find your customer lifetime value to be, the better acquisition costs you’ll get. And while thinking about increasing it, you will also have to build and strengthen your relationship with the customers. Hand by hand, all the benefits will start working out great for you, and soon you’ll find yourself in a much happier place.

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