A 4-minute guide to predicting the maximum amount spent retaining customers.

//A 4-minute guide to predicting the maximum amount spent retaining customers.

Customer lifetime value is the value a customer contributes to your business over their entire lifetime at your company. If you ever wonder

  • how much a customer is worth to you
  • how much you should spend to gain a new customer
  • how much you are spending to retain your existing customers
  • how to reduce your churn rate
  • how to calculate Customer Lifetime Value (CLV)

You have come to the right place.

 

Retention value

“Statistically speaking, the cost of acquiring a new customer costs five to ten times more than retaining an existing one. Not only that, but repeat customers spend, on average, 67% more.”

Repeat customers tend to buy a wider range of your products and service packages. They know that if they adore one of your products they will likely enjoy the others. Get to know your audience by understanding what products they buy, how often they buy and at what price. After a year time, statistical emerge will enable you to envision Customer Lifetime Value. Consequently, you are able to predict:

  • the net profit attributed to a customer lifetime relationship with your business,
  • the present value of the future cash flows attributed to a customer during their lifetime relationship with your company.

The budget spent on retaining the customers cannot exceed the amount of the above measure. Spending too much money, you have little to no profit. Spending too less, you will lose customers. A good question is- how do you predict the maximum amount a business should spend to retain your customers for profitability and sustainability?

Based on the results you desire and the amount of data available, there are two ways to calculate CLV.

  1. Simple approach- the linear fixed assumption

 

 

CLV= Average Order Value X Average Margin X Amount of Purchases per Year X Annual Retention Rate X Lifetime (in years)

In which:

Average Order Value: Average amount in ($) the client spends on orders

Average Margin: Average amount of profit margin per sale

Amount of Purchases/ Year: numbers of times the clients order from your business per year

Annual Retention Rate: Average retention rate is (1-Average Churn Rate)

Lifetime: Average amount of years your business retains each customer

The Average Retention Rate is (1-Average Churn Rate).

In this simple model, the future churn rate is assumed to be linear and equivalent to the churn rate of the first year. You might want to deduct a coefficient for unexpected churn in the first month.

 

Example: A client bought your product for $50 in January, $40 in September, and $30 in December. You assume that this client will stay for 5 years on average and guess 20% of your new clients will leave during this year. You also calculate that the average gross margin of your product is 25%.

We have:

Average amount in ($) the client spends on orders (Average order value) : ($50+$40+$30)/3= $40

Average Margin:                                       25%= 0.25

Amount of Purchases/ Year :                 3

Annual Retention Rate:                          1- churn rate = 1 – 0.2 = 0.8

Lifetime :                                                   5

CLV= Average Order Value X Average Margin X Amount of Purchases per Year X Annual Retention Rate X Lifetime (in years)

          = $40 x 0.25 x 3 x 0.8 x 5 = $120

Your CLV budget cannot exceed $120 to retain a client in a 5-year average lifetime. If you spend less and retain your customer longer, more profit will be made.

  1. Actual approach

This is a data-based approach where actual figures will determine the customer lifetime value. This approach is suitable for long-standing companies that have enough data over a longer time period. They no longer use average amounts but use actual amounts and real retention rate. Substitute these stats in the formula above, you will have a more accurate customer lifetime value.

  1. Actual cost

To assess the acquisition strategies while keeping in mind the potential profit customers contribute and the money to retain a customer, this approach deducts marketing and acquisition costs from your CLV. Acquisition cost is calculated by:

Acquisition cost = Total Amount Money Spent In an X Period / Number of New Customers Acquired during X period.

 

Application

Use this metric to revamp retention strategies. A door for loyal customers, growing CLV and bottom line is waiting for you.

Finding new customers and retain them could be tricky; thus, we created an A.I platform that assist business both. Why don’t you try it yourself?

Try our audit report!

Try our 30-day free trial!

For an in-depth product walkthrough- schedule a demo today!

2018-10-08T15:05:52+00:00