Calculating Customer Lifetime Value

1. Calculating Customer Lifetime Value CALCULATING CUSTOMER LIFETIME VALUE HOW-TO GUIDE

2. 2 Calculating Customer Lifetime Value How-to Guide Is your organization pouring out a large budget for sales & marketing activities and not seeing the returns? Is your organization focused solely on short term cash flows rather than long term profits? Is your organization unaware of how to calculate the potential profit of each client you bring in the door? If you answered yes to any of these questions, learning what customer lifetime value (CLV) is and how to calculate it may benefit your organization. Customer lifetime value goes by many names and abbreviations including CLV, lifetime value, user lifetime value, LTV and CLTV. Although its designations are far-reaching, they all share one general definition: HOW-TO GUIDE “The net present value of the cash flow relationship with a customer.” www.zurb.com What Is Customer Lifetime Value? Calculating Customer Lifetime Value Common sense tells us that the longer a customer is in relationship with a company, the more profitable that customer relationship is. However, many companies put the emphasis on new customer acquisition and not enough effort is made to retain existing customers. This is a mistake, because the financial impact of retaining customers is substantial: companies can increase profits by as much as 100% by retaining just 5% more of their customers. For these reasons¹, CLV is a crucial metric that most organizations overlook mainly because its definition and purpose are not entirely known. Understanding the monetary value each customer represents to your organization can help you budget correctly for your business needs, strategically plan your marketing initiatives and improve long-term relationships with your customer base. This How-To Guide details the definition of CLV, the advantages of calculating CLV and the stan- dard formula for calculating CLV. Download Demand Metric's Customer Lifetime Value 2 Calculating Customer Lifetime Value How-to Guide Is your organization pouring out a large budget for sales & marketing activities and not seeing the returns? Is your organization focused solely on short term cash flows rather than long term profits? Is your organization unaware of how to calculate the potential profit of each client you bring in the door? If you answered yes to any of these questions, learning what customer lifetime value (CLV) is and how to calculate it may benefit your organization. Customer lifetime value goes by many names and abbreviations including CLV, lifetime value, user lifetime value, LTV and CLTV. Although its designations are far-reaching, they all share one general definition: HOW-TO GUIDE “The net present value of the cash flow relationship with a customer.” www.zurb.com What Is Customer Lifetime Value? Calculating Customer Lifetime Value Common sense tells us that the longer a customer is in relationship with a company, the more profitable that customer relationship is. However, many companies put the emphasis on new customer acquisition and not enough effort is made to retain existing customers. This is a mistake, because the financial impact of retaining customers is substantial: companies can increase profits by as much as 100% by retaining just 5% more of their customers. For these reasons¹, CLV is a crucial metric that most organizations overlook mainly because its definition and purpose are not entirely known. Understanding the monetary value each customer represents to your organization can help you budget correctly for your business needs, strategically plan your marketing initiatives and improve long-term relationships with your customer base. This How-To Guide details the definition of CLV, the advantages of calculating CLV and the stan- dard formula for calculating CLV. Download Demand Metric's Customer Lifetime Value

3. 3 Calculating Customer Lifetime Value How-to Guide HOW-TO GUIDE Evaluates Proper Investment for Each Customer – Measuring CLV allows you to develop a more accurate sales & marketing budget. When you know the CLV, it makes it easier to justify more expensive account development activities early in the relationship with the customer. Valuation of a Customer Relationship – Knowing the dollar value of customers over the duration of the relationship allows you to better assess current and future profitability. The insights gained from this valuation enable more effective investment decisions about customer acquisition costs. Forecasts Potential Future Value of Customer Relationships – The CLV formula not only esti- mates current value of a client, but also takes into account the potential value of a client. With a numeric value for potential revenues, your organization can more accurately forecast potential total cash flow for future months and/or years. Emphasizes the Importance of Cultivating Long-Term Relationships – an understanding of CLV helps put the focus on client retention within your organization. Inherently, CLV encour- ages businesses to move past the short-term expense and instead view customer relationships through the lens of long-term profitability. Thus, nurturing customer relationships to eventually obtain these potential profits becomes an integral theme in client retention long-term. Advantages Of Measuring CLV Customer lifetime value (or CLV as we will refer to it for the remainder of this guide) attempts to assess the true, long-term value and/or profitability of each client/customer. The purpose of this metric is to help businesses identify how much to invest in the development of each account. Calculating CLV provides a multitude of benefits. In our opinion, the most important advantages of identifying CLV are: More specifically, “Customer lifetime value (CLV) […] is a prediction of the net profit […] attributed to the entire future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques. Customer lifetime value (CLV) can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.” www.wikipedia.com Calculating Customer Lifetime Value 3 Calculating Customer Lifetime Value How-to Guide HOW-TO GUIDE Evaluates Proper Investment for Each Customer – Measuring CLV allows you to develop a more accurate sales & marketing budget. When you know the CLV, it makes it easier to justify more expensive account development activities early in the relationship with the customer. Valuation of a Customer Relationship – Knowing the dollar value of customers over the duration of the relationship allows you to better assess current and future profitability. The insights gained from this valuation enable more effective investment decisions about customer acquisition costs. Forecasts Potential Future Value of Customer Relationships – The CLV formula not only esti- mates current value of a client, but also takes into account the potential value of a client. With a numeric value for potential revenues, your organization can more accurately forecast potential total cash flow for future months and/or years. Emphasizes the Importance of Cultivating Long-Term Relationships – an understanding of CLV helps put the focus on client retention within your organization. Inherently, CLV encour- ages businesses to move past the short-term expense and instead view customer relationships through the lens of long-term profitability. Thus, nurturing customer relationships to eventually obtain these potential profits becomes an integral theme in client retention long-term. Advantages Of Measuring CLV Customer lifetime value (or CLV as we will refer to it for the remainder of this guide) attempts to assess the true, long-term value and/or profitability of each client/customer. The purpose of this metric is to help businesses identify how much to invest in the development of each account. Calculating CLV provides a multitude of benefits. In our opinion, the most important advantages of identifying CLV are: More specifically, “Customer lifetime value (CLV) […] is a prediction of the net profit […] attributed to the entire future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques. Customer lifetime value (CLV) can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.” www.wikipedia.com Calculating Customer Lifetime Value

4. 4 Calculating Customer Lifetime Value How-to Guide M = gross profit margin per customer lifespan ($) RR = the percentage of customers that repurchase/renew for your product/service over a certain period of time (%) DR = the interest rate used to calculate the current value of future cash flows (%) This is the traditional model used to calculate CLV. As mentioned above, most organizations customize this model to suit their needs and some organizations use more advanced models that require in-depth calculations and the assistance of a specified tool. Although organizations tend to differ in the way they calculate CLV, many of them use a variation of the formula below: HOW-TO GUIDE Calculating Customer Lifetime Value Standard Formula For Calculating CLV CLV = M RR 1 + DR - RR X ( ) Customer lifetime value is an indispensable metric that can serve the long term monetary and strategic goals of your company. Since many organizations are unaware of the importance of this metric, understanding the purpose and advantages to CLV will put your company ahead of the curve when it comes to retaining and nurturing your customer relationships for the benefit of your bottom line. Bottom Line 4 Calculating Customer Lifetime Value How-to Guide M = gross profit margin per customer lifespan ($) RR = the percentage of customers that repurchase/renew for your product/service over a certain period of time (%) DR = the interest rate used to calculate the current value of future cash flows (%) This is the traditional model used to calculate CLV. As mentioned above, most organizations customize this model to suit their needs and some organizations use more advanced models that require in-depth calculations and the assistance of a specified tool. Although organizations tend to differ in the way they calculate CLV, many of them use a variation of the formula below: HOW-TO GUIDE Calculating Customer Lifetime Value Standard Formula For Calculating CLV CLV = M RR 1 + DR - RR X ( ) Customer lifetime value is an indispensable metric that can serve the long term monetary and strategic goals of your company. Since many organizations are unaware of the importance of this metric, understanding the purpose and advantages to CLV will put your company ahead of the curve when it comes to retaining and nurturing your customer relationships for the benefit of your bottom line. Bottom Line

5. 5 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Understand Value of Customers Evaluate Proper Investment Cultivating Long-Term Relationships Knowing the dollar value of customers over the duration of the relationship allows you to better assess current and future profitability. The insights gained from this valuation enable more effective investment decisions about customer acquisition costs. Action Plan STEP 1 - Understand Value of Customers The Aid of Your Customer Lifetime Value Calculator Forecast Potential Future Value Customer Lifetime Value Calculator V I E W R E S O U R C E 5 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Understand Value of Customers Evaluate Proper Investment Cultivating Long-Term Relationships Knowing the dollar value of customers over the duration of the relationship allows you to better assess current and future profitability. The insights gained from this valuation enable more effective investment decisions about customer acquisition costs. Action Plan STEP 1 - Understand Value of Customers The Aid of Your Customer Lifetime Value Calculator Forecast Potential Future Value Customer Lifetime Value Calculator V I E W R E S O U R C E

6. 6 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Understand Value of Customers Evaluate Proper Investment Measuring CLV allows you to develop a more accurate sales & marketing budget. When you know the CLV, it makes it easier to justify more expensive account development activities early in the relationship with the customer. Action Plan STEP 2 - Evaluate Proper Investment for Each Customer Cultivating Long-Term Relationships Metrics to Know Each Customer and Understand Their CLV Forecast Potential Future Value Marketing Budget Template V I E W R E S O U R C E 6 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Understand Value of Customers Evaluate Proper Investment Measuring CLV allows you to develop a more accurate sales & marketing budget. When you know the CLV, it makes it easier to justify more expensive account development activities early in the relationship with the customer. Action Plan STEP 2 - Evaluate Proper Investment for Each Customer Cultivating Long-Term Relationships Metrics to Know Each Customer and Understand Their CLV Forecast Potential Future Value Marketing Budget Template V I E W R E S O U R C E

7. 7 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Forecast Potential Future Value The CLV formula not only estimates current value of a client, but also takes into account the potential value of a client. With a numeric value for potential revenues, your organiza- tion can more accurately forecast potential total cash flow for future months and/or years. Action Plan STEP 3 - Forecast Potential Future Value of Customer Relationships Evaluate Proper Investment The Power of Your Customer Cash Flow Forecast Understand Value of Customers Cash Flow Forecast V I E W R E S O U R C E Cultivating Long-Term Relationships 7 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Forecast Potential Future Value The CLV formula not only estimates current value of a client, but also takes into account the potential value of a client. With a numeric value for potential revenues, your organiza- tion can more accurately forecast potential total cash flow for future months and/or years. Action Plan STEP 3 - Forecast Potential Future Value of Customer Relationships Evaluate Proper Investment The Power of Your Customer Cash Flow Forecast Understand Value of Customers Cash Flow Forecast V I E W R E S O U R C E Cultivating Long-Term Relationships

8. 8 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Cultivating Long-Term Relationships An understanding of CLV helps put the focus on client retention within your organization. Inherently, CLV encourages businesses to move past the short-term expense and instead view customer relationships through the lens of long-term profitability. Thus, nurturing customer relationships to eventually obtain these potential profits becomes an integral theme in client retention long-term. Action Plan STEP 4 - Emphasize the Importance of Cultivating Long-Term Relationships Evaluate Proper Investment Forecast Potential Future Value How Your CLV Gets Even Better in the Long Run Understand Value of Customers CRM Program Playbook V I E W R E S O U R C E 8 Calculating Customer Lifetime Value How-to Guide 1 2 3 4 Cultivating Long-Term Relationships An understanding of CLV helps put the focus on client retention within your organization. Inherently, CLV encourages businesses to move past the short-term expense and instead view customer relationships through the lens of long-term profitability. Thus, nurturing customer relationships to eventually obtain these potential profits becomes an integral theme in client retention long-term. Action Plan STEP 4 - Emphasize the Importance of Cultivating Long-Term Relationships Evaluate Proper Investment Forecast Potential Future Value How Your CLV Gets Even Better in the Long Run Understand Value of Customers CRM Program Playbook V I E W R E S O U R C E

9. Demand Metric is a marketing research and advisory firm serving a membership community of over 100,000 marketing professionals and consultants in 75 countries. Offering consulting playbooks, advisory services, and 500+ premium marketing tools and templates, Demand Metric resources and expertise help the marketing community plan more efficiently and effectively, answer the difficult questions about their work with authority and conviction, and complete marketing projects more quickly and with greater confidence — thus boosting the respect of the marketing team and making it easier to justify resources the team needs to succeed. To learn more about Demand Metric, please visit www.demandmetric.com About Demand Metric Follow us on Twitter Like us on Facebook Join Linkedin Group © Demand Metric Research Corporation. All Rights Reserved. Demand Metric is a marketing research and advisory firm serving a membership community of over 100,000 marketing professionals and consultants in 75 countries. Offering consulting playbooks, advisory services, and 500+ premium marketing tools and templates, Demand Metric resources and expertise help the marketing community plan more efficiently and effectively, answer the difficult questions about their work with authority and conviction, and complete marketing projects more quickly and with greater confidence — thus boosting the respect of the marketing team and making it easier to justify resources the team needs to succeed. To learn more about Demand Metric, please visit www.demandmetric.com About Demand Metric Follow us on Twitter Like us on Facebook Join Linkedin Group © Demand Metric Research Corporation. All Rights Reserved.