Measuring customer lifetime value (CLV)

  • 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”

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