The customer lifetime value equation (CLV) gives a plethora of information to a company. The components of this equation gives a company knowledge about the quality of a customer, the worth of a customer, and tools to determine what will deem success to a future acquisition.
The equation for CLV can be as simple as net profit per unit x average orders made per customer in her lifespan. But to find numbers for each section, you must find some initial information first.
If you are a simple company, finding your net profit per unit is easier. If you sell one type of product/service, subtract what you charge by all costs. All costs must be specified per unit – what are your costs to sell one unit? If you are a complicated company, you need to think of all costs associated with creating and selling a unit and break that down into each product.
You must find your customer’s average lifetime span and average annual orders to figure average orders per customer.
You can find the average customer lifetime span by calculating how many months each customer was with your company – from beginning until the end. So your Excel sheet should have a specific amount of months per customer. Add this number up, then divide that number into your total customers. You’ll end up with an average amount of months customers stay with your company. Convert these months into years.
You can find the average annual orders by figuring out how many individual customers you have, then dividing that number into total annual orders.
Find average orders in a customer’s lifetime span by multiplying the years you found by the average annual orders.
