Calculate Your Customers’ Lifetime Value

Customer Lifetime Value (CLV) equals the estimated, finite amount of money a customer will spend with your company.  Putting it to use can help you decide how much you should spend on a marketing campaign.

To illustrate, let’s say you own a cleaners company and you have data showing your customers spend $100 a month over a 3 year period of time.  This means your CLV is $3,600 ($100 x 12 months x 3 years).

Depending on your allowable profit margins, you can now confidently set your marketing budget to not exceed the limits of an attractive ROI.  Say you determine that you would like to stay at 7%; this means your allowable cost for acquiring a new customer should not exceed $252.

Using Customer Lifetime Value

Let’s say you have the following information for your new email campaign:

·         You are paying your marketing company $102 to design and manage your email campaign.

·         You are sending to 230 subscribers

·         Email response rate is 0.9%

This means your estimated return will be 2 new customers (230 x .9% = 2.07).  These two new customers will bring in a total of $7,200 over the course of the next three years while still using less than your total allowable expense.  Now you can take this same formula and consider using it to expand your marketing efforts with the unused allowance.

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