- Today I am looking at how you can use customer lifetime value to prove your business model when articulating your story as part of a business plan.
The same rules apply if your selling to consumers or to businesses.
- Agree how much each order is worth to you
- Exclude sales tax
- Deduct all credits, including returns, cancellations and loyalty rewards
- Take margin after costs of delivery
- Define what retention means
- Who is a new customer – first ever purchase or first purchase in 3 years
- Don’t count credits as a part of retention – easy mistake to make
- How do you measure the cost of acquiring new customers?
- Agree what costs need to be captured over an agreed period
- Divide by your new customers acquired in the same period
- Be careful of CRM tools or ERP plug-ins that you can subscribe for to measure CLV
- Make sure data is being captured correctly and toes back to financials reported
- Ensure credits and sales tax are dealt with properly – often a problem
- You need to demonstrate that CLV is growing and shows a healthy return on the costs of acquiring a new customer.
Tip: Be consistent. There are multiple ways to capture and report CLV. Whatever you use make sure it makes sense and stick with it – measuring and understanding on trends can only be done if you are comparing “apples with apples”