Succeed As Your Own Boss

ENDING SMALL BUSINESS FAILURE

  • Home
  • About
  • Book Melinda
  • Consulting
  • SBL Store
  • SmallBizLady University
  • Subscribe to Podcast
  • #Smallbizchat
    • Be a #SmallBizChat Guest
  • Blog
  • Contact
You are here: Home / Cash Flow & Finance / Understanding Customer Lifetime Value & Why It Is Important

Understanding Customer Lifetime Value & Why It Is Important

October 16, 2017 By Melinda Emerson Leave a Comment

Feel free to share...Share on Facebook
Facebook
Tweet about this on Twitter
Twitter
Share on LinkedIn
Linkedin
Pin on Pinterest
Pinterest
Share on Reddit
Reddit
Email this to someone
email
Print this page
Print

How can you tell if your company is succeeding? Usually by looking at operating metrics like sales, revenues, and profit margin and then comparing these figures to your annual projections, historical numbers, or competitors in the same industry. But what metrics can you use to determine your company’s success in the long term? One of the most useful calculations is the company’s customer lifetime value or CLV. As the term implies, the customer lifetime value represents the total amount of money that a particular customer is likely to spend over his or her lifetime. It’s easy to see how CLV can be used to help predict future revenues for a company.

How To Compute Customer Lifetime Value

There is a myriad of ways to calculate customer lifetime value, but the simplest one involves just three components: the average order value, the purchase frequency, and the customer lifetime length.

The average order value represents how much money the typical customer spends when he or she is placing an order. The quickest way to determine this figure is to take the total revenues for a given time period (i.e., per week, per month, per quarter, per year) and divide it by the number of orders in that time period.

The purchase frequency represents how often a typical customer makes a purchase with your company. This can be computed by taking the total number of orders in a given time period and dividing it by the total number of customers in that time period.

The customer lifetime length represents the length of the time period during which the typical customer makes purchases from your company. Unless a company possesses several years’ worth of sales data, this value can be difficult to calculate. For new businesses, the assumed customer lifetime length is usually about three years.

When you multiply these three metrics together, you get the customer lifetime value.

Here’s an example: Let’s say that you own a candy store and you want to determine the CLV of your business. When you scour your purchase records, you discover that the average order value is $12.50 and that each customer places 2.5 orders on average each month. You would multiply $12.50 and 2.5 to get $31.25, which is the average customer value per month. If you assume a customer lifetime length of three years, you would then multiply $31.25 by 36 (the number of months in three years) to get a customer lifetime value of $1,125.

(AVG x PF) x CFL = CLV

($12.50 x 2.5) x 36 = $1,125

The Significance of CLV

CLV is important for a variety of reasons. First, it can act as a benchmark for future growth and expansion. It’s also an excellent way to help determine the worth of your business in the event you wish to borrow money, seek outside funding, or sell your company. You can also tweak the computations to figure out a customer lifetime gross margin, costs, and other metrics by substituting them (on an average basis) in place of the average order value.

More broadly, CLV demonstrates the significance of repeat business and can help you shift your priorities accordingly. While acquiring new customers is nice, getting current customers to purchase more from you is often more important; plus, these customers tend to require lower costs and usually produce higher customer satisfaction ratings.

Therefore, it’s essential that every entrepreneur and business owner that’s been in business any significant length of time evaluate customer lifetime value as a key component of their small business strategy. Otherwise, how will you know what your business is worth to you in the long run?

Want to learn more about important metrics for your business? Join me Wed 8-9pm for #Smallbizchat on twitter. It’s a great way to get answers to your small business questions.’

Feel free to share...Share on Facebook
Facebook
Tweet about this on Twitter
Twitter
Share on LinkedIn
Linkedin
Pin on Pinterest
Pinterest
Share on Reddit
Reddit
Email this to someone
email
Print this page
Print

Filed Under: Cash Flow & Finance, Grow Your Business, Starting A Small Business Tagged With: customer lifetime value

Fix Your Business Now!

Order SmallBizLady's new book Fix Your Business, 90-Day plan to Get Back Your Life and Reduce Chaos in Your Business. It includes the 12 Ps of Running a Successful Business and readers will finish the book with a new strategic plan to take their business to the next level.

About Melinda Emerson

Melinda F. Emerson, “SmallBizLady” is America’s #1 Small Business Expert. She is an internationally renowned keynote speaker on small business development, social selling, and online marketing strategy. As CEO of Quintessence Group, her Philadelphia-based marketing consulting firm serves Fortune 500 brands that target the small business market. Clients include Amazon, Adobe, Verizon, VISA, Google, FedEx, Chase, American Express, The Hartford, and Pitney Bowes. She also has an online school, www.smallbizladyuniversity.com, that teaches people online marketing and how to start and grow a successful small business and publishes a blog SucceedAsYourOwnBoss.com. Her advice is widely read, reaching more than 3 million entrepreneurs each week online. She hosts The Smallbizchat Podcast and is the bestselling author of Become Your Own Boss in 12 Months, Revised and Expanded, and Fix Your Business, a 90 Day Plan to Get Back Your Life and Reduce Chaos in Your Business.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Let’s Connect

  • Facebook
  • Instagram
  • LinkedIn
  • RSS
  • Twitter
  • YouTube

We’re proud to be part of the Mediaplanet Empowering Small Business campaign! The COVID-19 pandemic brought hardship and ruin on the nation’s small businesses, but there’s now reason for hope. Learn about the resources, support, and tools available to help your small business bounce back and grow stronger than ever by picking up a copy of the campaign in USA Today and reading it online here.

Get a FREE Chapter of SmallBizLady’s Book,
"Become Your Own Boss in 12 Months, Revised and Expanded"!

Become Your Own Boss

Let me send my best blog posts to your inbox each week.

Most Popular Posts

>Seven Ways to be More Profitable in Your Small Business
> 7 Ways to Attract Customers to Your Small Business
> 6 Tips for Managing Small Business Finances
> How to Run a Successful Multilevel Marketing Business
> 10 Ways to Grow Your Small Business With Instagram
> How to Sell on Facebook
> How to Get Over the Fear of Starting a New Business

Featured Videos

Bloomberg News Interview
How to Support Small Businesses During the Holidays

“12 Principles of Highly Profitable Businesses with Melinda Emerson” from Sonia Dumas
October 2020

MSNBC Interview
Top Tip: Never Let a Customer Down

National Speakers Association
Winter Conference 2016

Fox Business
Five Steps to Becoming a ‘Social Media Ninja

MSNBC
The importance of job mentoring for women

#SmallBizChat Live
National Small Business Week: Q&A

Good Day Philadelphia
Expert Shares Tips on How to Become Your Own Boss

Google
Best Practice for Social Media

Testimonials

Become Your Own Boss is a must read if you’re thinking of launching a business of your own.
Jean Chatzky, Bestselling Author of Money 911 and Financial Editor of NBC’s Today Show
Great step-by-step advice for anyone looking to start their own business.
Andrew C. Taylor, Chairman, Enterprise Rent-A-Car
Melinda Emerson has written a remarkable book. It is essential reading for anyone seeking to make the transition from working girl to successfully working it, as an entrepreneur.
Cynthia McClain-Hill, Past President, National Association of Women Business Owners
The perfect companion for those planning to go out on their own. Melinda delivers firsthand practical advice on how to be the successful entrepreneur. Read it if you want to get it right the first time.
Kenneth L. Shropshire, Professor at the Wharton School of Business, University of Pennsylvania
If you are looking for a versatile speaker who can talk about how to grow small businesses or get started with social media, look no further.
Heather Van Sickle Executive Director, National Association for Community College Entrepreneurship (NACCE)
Her wit and depth of subject knowledge were entertaining and empowering. Melinda is definitely on our short list of seasoned entrepreneurs and business leaders we look to invite back in the near future.
Tennille M. Robinson Senior content & Event producer for Inc. magazine
Melinda Emerson, “SmallBizLady,” is an engaging and witty speaker and a great addition to any conference. Her terrific presentation and compelling delivery give people the information they need and want to become their own bosses and grow success… Read more
Laurie Dalton White Conference Director, Pennsylvania Conference for Women
Melinda Emerson has been a fantastic small business and social media resource for the Pitney Bowes team. Not only is she personable and easy to work with, but she also has an innate understanding of the small business audience. My marketing programs … Read more
Justin Amendola, Former VP, Global SMB Digital Strategy, Pitney Bowes

SmallBizChat

  • Twitter

Latest #SmallBizChat

Becoming an Entrepreneurial Warrior with Zachary Green Featured Image

The SmallBizChat Podcast: Becoming an Entrepreneurial Warrior with Zachary Green

Zachary Green’s experiences in the Marine Corps shaped his destiny. His time in the military, then as a firefighter, gave him the resourcefulness, integrity, and grit to become a highly successful entrepreneur and best-selling author. Taking risks, trusting himself, and never letting go of his dreams drove him to create, produce, market, and sell a […]

Fix Your Business Q&A Video

Recent Posts

  • The SmallBizChat Podcast: Becoming an Entrepreneurial Warrior with Zachary Green
  • 10 Tips to Creating an Effective Content Calendar
  • The SmallBizChat Podcast: How to Build a Business Transition Plan with Laurie Barkman
  • How to Prepare Your Small Business for a Recession
  • The SmallBizChat Podcast: How to Grow Your Business Leadership with Molly Gimmel

Categories

  • 10 Things Lists
  • 12 Things
  • 15 Things Series
  • 31 Ways to Boost Your Small Business
  • Ask Smallbizlady
  • Become Your Own Boss Tips
  • Branding & Marketing
  • Business Inspiration
  • BYOB2011
  • Cash Flow & Finance
  • Customer Service
  • Featured Post
  • Featured SmallBizChat
  • Fix Your Business
  • Grow Your Business
  • Guest Articles
  • How to Start
  • Leadership
  • Melinda Emerson @SmallBizLady
  • Mompreneurs
  • My Recommendations
  • Pink Slip Entrepreneurs
  • Q & A Interview
  • SmallBizChat
  • SmallBizChat Live+
  • SmallBizLady Recommends
  • SmallBizRadio
  • Social Media
  • Solopreneurs
  • Special Reports
  • Starting A Small Business
  • Teams
  • Technology
  • Telesummit
  • The SmallBizChat Podcast
  • Uncategorized
  • Women in Business
  • Your Small Business

#SmallBizChat

  • SmallBizChat Archive
  • @SmallBizLady

Business Advice

  • How to Start

SmallBizLady Store

  • Products
  • Free Chapter

Get In Touch

  • Write For Us
  • FAQ
  • Be a #SmallBizChat Guest
  • Contact Us
Copyright © 2021
Quintessence Group
PO Box 280
Drexel Hill, PA 19026
(610) 352-0680
Privacy Policy · Refund Policy

Copyright © 2022 · News Pro Theme on Genesis Framework · WordPress · Log in