In advertising, customer lifetime value, customer lifetime income, or long-term customer income is a statistical computation of the net gain or loss obtained from a customer. It is expressed as a percentage of overall revenue. Other factors such as level of service, price, and target market affect the calculation of this number but it is most often derived from direct sales or marketing surveys. Customer lifetime value is also called the gross profit margin.
There are many methods to calculate the CLV for a particular product line. One method of calculation is to multiply the current gross profit per year by the average number of units sold in each of the last five years. Another method is to multiply the net income earned by the last five years by the average unit cost or price sold in the last five years. The net income statement will provide an accurate depiction of your company’s profitability and allow the management to set annual goals for increasing net profits. This analysis of profitability can be complex and requires a trained accountant or financial professional.
A common metric used in measuring customer lifetime value is total revenue per customer. It is calculated by dividing total revenue by the number of customers served in the last twelve months. Common metrics used to calculate this number include year to date sales per customer, average sale price, and loyal customers per customer. Many companies mistakenly believe that customer loyalty means returning to the company and this can negatively impact their CLV measurement. Loyalty should be defined as the willingness to purchase more products or services from the company within the last twelve months; however, if a customer has not bought anything in the past twelve months then they are not considered to be loyal.
A second important metric to track is customer lifetime value or ecommerce retention. This metric measures the rate at which a customer stays with an ecommerce site, versus the rate at which they abandon their shopping cart. Many companies incorrectly measure ecommerce retention because they do not take into consideration the fact that a person might become frustrated when trying to complete their orders.
The third key metric is brand loyalty. The most commonly measured brand loyalty is the perceived level of trust or customer confidence in a brand. The best way to determine brand loyalty is to survey existing customers on a regular basis; however, many companies do not take this important step. While surveying customers is another way to determine whether a brand is successful at increasing brand loyalty or not, it may prove to be ineffective for ecommerce businesses because of the short turnaround times necessary to develop customer loyalty.
Marketing campaigns should also track and analyze multiple channels to determine where opportunities lie. Marketers must understand that each customer touch point will require a different strategy. Therefore, it is important for marketers to determine where they want to spend their marketing dollars and then they must optimize each channel for that purpose. This enables marketers to maximize their return on investment and to ensure that all channels are effective for increasing customer lifetime value.