Marketing, the backbone of any business should be carried out in a very sophisticated and effective manner in order to experience reasonable increase in profit and return on investment. The most important part of any marketing system is calculating the lifetime value of the customer. In this post we are going to discuss a simple way to calculate your customer's lifetime value and how to use this information to increase your return on investment (ROI).
Customer lifetime value (CLV) is an estimated profit on the sales cost made by a long-term customer. For example, let's say that an average return customer brings in a typical profit of $100 a month to your business. That same customer has a lifetime span of 4 years. So when you multiply the amount of profit per month with the lifetime of the customer ($100 x 48 months) you come up with the customer lifetime value, which in this case is approximately $4800. Of course, the lifetime span may vary according to different companies. On the whole, CLV provides an estimated, near accurate figure of an organization's future profits.
Knowing the customer lifetime value can help your business increase profits while decreasing marketing expenses. Of course you should also have a marketing plan in place that allows you to track how many customers you are getting from different sources of marketing campaigns. If you know that the lifetime value of an average customer is $4800 you can very easily see that spending $5000 on a television commercial that possibly only brings in one traceable customer, is costing you money.
However, if you are running a $300 a month online marketing campaign and obtaining 5 new average customers (bringing in $100 in sales each) you would be profiting $200 a month. You could than use that knowledge to control exactly how many new customers you want y controlling how much you spend on advertising.
You see how knowing the customer lifetime value allows you to save money and increase your return on investment. With a good marketing campaign in place that allows you to track how many new customers you are bringing in through it, you can actually control what your profit is per customer.
Let's say you want to have a 75% profit or return on investment per customer, which would be $75 a month in the case of the previous example, you would spend $25 dollars a month per customer. So, if you want to bring in 10 new customers a month, you would spend $250 in marketing expenses.
Utilizing this information can help you control exactly the amount of profits you are generating, giving you the upper hand in your business type. Once you have a great marketing plan in place, you can control the exact amount of new customers you bring in on a monthly basis and control the profit that you receive from them. Knowing this information can be a powerful tool for your business.