How to calculate your customer lifetime value
From social media followers to daily website visitors, we’re overwhelmed with numbers in business today. But which ones give you the most accurate measure of success?
It’s easy to get caught up in vanity metrics when tracking the success of your business or marketing plans. You’ve just got your thousandth Twitter follower! 500 people read your blog yesterday. An influencer with 100,000 followers just liked your last Instagram post.
But how much do these numbers tell you really?
Can you genuinely measure the success of your business on how many people follow your social media posts, or happened to click on a link?
Surely, the only true measure of business success (after all, this isn’t a hobby, which means money has to enter the equation at some point) is profit? And to make a profit in business, you need customers who love what you do, and are happy to part with money to pay for it.
But how can you tell if your business is really making a profit? One way you can calculate how successful your business is, is to work out your customer lifetime value.
Your ‘customer lifetime value’ is the profit you estimate you will receive from your average customer. This calculation evaluates the average value of a sale, the average number of transactions over a given period (for example, a year), the average rate of retention (how long they stay with you, for example two years), and the profit margin.
Here’s what the calculation looks like:
Customer lifetime value = average value of sale × number of transactions × retention time period × profit margin
To help you get to grips with this concept, work out your own customer lifetime value, and even find ways to increase the lifetime value of your customers, check out the customer lifetime value infographic below.
Photo by Ellen Auer