Calculating customer lifetime value in the first place is not complicated.
There are two methods of calculating customer lifetime value: predictive and historical.
While the predictive CLV describes a customer’s future sales to a company over the lifetime of the customer relationship, the historical CLV is the sum of all profits from a customer’s past sales. This value is based on existing customer data in a specific time period.
The simplest way is to look at contribution margins as well as costs incurred based on historical data:
The basis is the average revenue of a customer. It doesn’t matter whether this is made up of various purchases, service fees, or whatever.
If additional costs for customer care and service are expected in the future, these should also be included in the calculation.
What is the benefit of customer lifetime value?
For many companies, calculating customer lifetime value is the basis for determining their marketing budget and planning their product development.
Other benefits include:
- The “good customers” can be identified and retained, while “bad customers” may churn or even be weeded out.
- Customers identified as important can be better served, while unimportant customers can be served with little effort.
- Acquiring new customers does not have to be done at “any price”.
- You can divide your customers into different customer groups.
- Customer loyalty programs can be designed to fit exactly.
- Investments in marketing or sales can be calculated more efficiently.
- Optimization of customer relationship management, through the inclusion of appropriate content.
Difficulties in calculating the customer lifetime value
The calculation becomes difficult when the buying behavior of a typical customer varies greatly. Particularly in B2B marketing, this leads to a high degree of predictive uncertainty.
In addition, it is almost impossible to convert costs incurred to individual customers. No one knows to what extent the cost of new training rooms actually improves customer loyalty.
The basis for the calculation is usually practical empirical values. Younger companies, especially start-ups, therefore have to use benchmarks from competitors or industry benchmarks as a guide. This is not quite so simple.