What is Customer Lifetime Value?

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In the bustling realm of digital marketing, many entrepreneurs overlook a hidden treasure – the Customer Lifetime Value (CLV). Dive in to discover not only the significance of this metric but also the goldmine it represents for your business.

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The Mystery Behind CLV

I’ve worked with numerous clients eager to leverage the benefits of digital marketing, from Google Ads to SEO and funnel creation. Quite often, they’re hyper-focused on the immediate ‘cost per acquisition’. But the true question is: Are they considering the long game? This is where the magic of CLV comes into play.


What is CLV?

Simply put, CLV represents the total profit you’ll gain from a customer throughout their entire relationship with your business. Knowing this can profoundly shift how you view your marketing spend and campaign ROI.


CLV in Action: A Simple Illustration

Imagine running a Google Ads campaign, spending £500 and acquiring four customers. That means your cost per acquisition (CPA) is £125. But how do you measure the real value of those acquired customers?

Calculating Your CLV:

  1. Determine the profit per year or the entire duration of a customer relationship.
  2. Multiply it by the average duration of that relationship.
  3. Subtract your CPA.

For instance, if a customer pays you £3,000 per year and costs £1,000 to service, your profit stands at £2,000. If on average, they remain loyal for 2.5 years, the simple math gives you: (£2,000 profit x 2.5 years) – £125 (CPA) = £4,875 CLV.

Suddenly, that initial £125 CPA doesn’t seem so daunting, does it?


The Bigger Picture

Gaining a customer for £125, only to reap a potential £4,875 over their lifetime, seems like a solid investment. Instead of stressing over immediate gains, understanding CLV lets you plan for the long-term.

Moreover, CLV insights can guide other business decisions, like formulating effective upsells, designing retention strategies, and enhancing customer service. If you’re retaining a customer for an average of 2.5 years, imagine the potential growth in profits by extending that relationship to 3 or 4 years!


Conclusion

Mastering the art of CLV is more than just a tactical move; it’s a business imperative. With a deeper understanding of your customers’ worth, you can better allocate marketing budgets, improve retention, and elevate your bottom line.


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