Calculating Your Customer’s Lifetime Value To Establish Your Marketing Budget
March 12, 2020
Understanding your Customer’s Lifetime Value (CLV) will help you to make decisions about your marketing investments and general business decisions. Not all leads, clients, or projects are the same. Because of this, it is important that you are able to put a value onto each.
What Is CLV?
The Customer Lifetime Value is how much income you expect to generate from your client while you work together. It will help to make sure that you aren’t spending too much on your marketing, ultimately costing your company money. By knowing what your customers are worth to you on average, you will be able to tailor your marketing costs accordingly.
How Do You Determine CLV?
To calculate CLV, you’ll need to determine the average purchase price for all clients over the past year. You will then need to determine how often people are buying, and how long customers typically stay with you. Knowing these numbers, you will be able to calculate an average CLV, giving you greater insight into your business.
How Much Would You Trade To Get A New Client?
Let’s say you were to invest $1,000 next month into a marketing plan that would bring you five new customers. Would that be worth it to you? That depends on the CLV of the people buying from you.
Here are two SIMPLE examples of how to think about this for your business:
A Business That Sells Goods
Let’s say you sell baby clothes and the average customer shops with you 2 times a year, spending $75 on each visit or $150 annually. After about 4 years your customer’s child outgrows your products, thus the average CLV of your customers is $150 x 4 or $600.
Spending $1,000 gets you 5 new customers who may bring you $3,000 in sales over the next four years. If your profit margins are 50% then spending $1000 to gain $1500 in profit over the next four years, may not prove to be a smart move when you consider it takes 4 years to see an ROI.
A Business That Offers Services
Let’s say you are a personal trainer who charges clients $65 per hour. Your clients come to you about 6 times a month and tends to work with you for about 5 months before thinking they can do it on their own. The average CLV of your clients would be $1,950 or $65 x 6 visits x 5 months.
Spending $1,000 to get five new clients can potentially bring in $9,750 over the next five months which will likely be a great investment. With this example, you will have a much greater ROI than the person selling baby clothes. Remember, when you are calculating CLV, consider your profit dollars, not just your top line sales!
Using CLV To Perfect Your Marketing Budget
Determining the CLV for your customers will not only ensure you aren’t overpaying to bring people in the door, but it will also tell you how much you can and should spend. Some people may feel uncomfortable when they see high numbers in their marketing budget, but when you think about the return, the amount spent upfront can be a smart investment.
When creating your marketing budget, it’s not about how little you can get away with. It’s about using the right marketing tools, to attract the right clients. Sometimes spending more upfront, will provide you with huge returns when all is said and done.
Of course, the longer you are able to retain a client, the more they are worth to you. Knowing your CLV will help you create client retention strategies, enabling you to generate even more income for your business. You’ll be able to get a better idea of purchase frequency, annual trends, and which products and services are the most valuable to your business.
Do you know what the average Customer Lifetime Value (CLV) of your clients is? Once you find out what they are spending and when, you’ll know exactly what they are worth and what you should be spending in to get them in the first place.