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Over the course of your company’s relationship with a client, he/she is the one generating profit for the entire time. But did you know that there’s a way to measure the amount of gross profit? It’s called customer lifetime value, or LTV for short, and it is one of the main stats that are likely to be tracked as a part of the customer experience program.

The following paragraphs will briefly explain what it is and how it’s measured.

Definition and Interpretation

Basically, the customer lifetime value measures the total worth of a client to a business during their whole relationship. The metric is very important because it’s less pricey to maintain the existing customers than to gain new ones. Therefore, if you increase your existing customers in value, you can generate more growth.
Let’s say that, for instance, an average Chinese food restaurant customer has a CLV of $1,000. At the same time, acquiring a new customer requires more money than that, because of the offers, advertising, and marketing, that are not cheap. Unless it recovers its acquisition costs, the restaurant could be losing a lot of money.

CLV is helpful in providing companies with ideas that could save them from losing profit while gaining new customers.

How is it Measured?

If, for instance, you kept buying a $60 product annually from the same seller, your CLV has been worth $600 to them. That sounds easy so far, doesn’t it? Well, things can get more complicated when it comes to companies.
Because of inadequate systems, untargeted marketing, and other factors, some firms don’t even attempt to measure the CLV.

In order to measure CLV, companies may:

  • Identify where the customer creates the value
  • Create a customer journey by integrating records
  • Measure each touchpoint’s revenue
  • Add together over the customer’s lifetime

The formula that lets you calculate the CLV looks like this:

Gross margin (%) x Lifetime in pay periods length x Revenue per subscription per pay period

How is CLV Important to Your Company?

When you have a long-time relationship with a customer, it’s a great metric. For instance, if the customer has a paid internet contract, you can spot the early signs of attrition when using this metric. So, if the spend drops after the customer’s first year of subscription, it’s a sign of attrition.
Therefore, this metric is a good way to figure out ways to gain new customers without losing profit or to keep the existing ones.

How can You Increase the CLV?

CLV can be increased – you just have to take care of each and every customer, so they maintain their loyalty to you. You can increase it by:

-Showing you know your customers by sending them things they had no idea they wanted
-Solving any problem a customer may have
-Improving customer service
-Rewarding loyalty

Hopefully, based on the information this article contains, you are aware that this metric is important in a company’s well-functioning. So, if you are not tracking your CLV yet, it’s time to start.

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