Client Lifetime Value
Client Lifetime Value (CLV): an estimate of the net profit that will result from a single client over the time they deal with you.
These days, marketing strategies are focusing on becoming more client-centric. All businesses need to learn the value of applying an equal emphasis to retention of existing clients as they do to attracting new ones. How much you spend on retaining a client should be relative to the profit that client is likely to contribute. And the easiest way to measure the value of a client is to calculate your average CLV.
Determining a CLV also can be used as an evaluation tool, defining characteristics that produce higher values and exposing behaviors that influence the CLV. There are different calculations that can be used depending on what variables are in play. Below is a simple Ecommerce example:
$100 average monthly spend * 25% margin/ 5% monthly churn = $500 CLV
In this example the variable ‘churn rate’ is the percentage of clients who end their relationship with the business, in a given time period. You could use other variables such as a discount rate, retention cost, contribution margin and period (the unit of time in which the client relationship is analyzed, usually one year), however the simpler approach will still give you good information. By estimating a client's value you will have solid information for your marketing decisions.
The lifetime value can also evaluate how much is appropriate to spend on acquiring a client. For example, if a potential client costs $100 to acquire, and their CLV is $150, there is a potential for a $50 profit. The clear message is the longer you invest in and nurture your client relationships the higher their CLV and the more profitable your company. With the right diagnostic tools and regular evaluations, your firm can consistently and effectively work towards the goal of increasing CLV’s for all existing clients.
When you understand how some clients/groups provide very little profitability to your firm, it’s an easy step to realizing that not all clients are equal.