How can you use customer lifetime value analysis to evaluate long-term profitability?

2 How to calculate CLV?

There are different methods and formulas to calculate CLV, depending on the complexity and availability of your data. One of the simplest ways is to use the following formula:

CLV = (Average order value x Purchase frequency x Average customer lifespan) x Profit margin

This formula assumes that your customers have a fixed purchase frequency and lifespan, and that your profit margin is constant. However, you can also adjust the formula to account for variations in these factors, such as by using a discount rate to reflect the time value of money, or by using a retention rate to estimate the probability of a customer staying with you.

3 How to use CLV to evaluate long-term profitability?

Calculating the CLV of your customers can help you evaluate your long-term profitability and make better decisions for your sales management. For example, you can compare the CLV of different customer segments to identify the most profitable and loyal customers, then focus on retaining and growing them. Additionally, you can compare your CLV with the cost of acquiring customers (CAC) to determine your return on investment (ROI) and optimize your sales and marketing budget. Generally, it's advised that your CLV should be at least three times higher than your CAC to ensure profitability. Additionally, you can compare the CLV of your customers before and after implementing a sales or marketing initiative to measure its effectiveness and calculate the increase in your CLV.

4 How to improve your CLV?

Improving your CLV is essential for sales management, as it can boost long-term profitability and competitive advantage. To do this, you should focus on increasing customer retention, purchase frequency, average order value, and profit margin. For example, providing excellent customer service and creating value-added offers can help to retain customers. Additionally, sending personalized and timely messages, creating loyalty programs, and offering incentives for repeat purchases can increase purchase frequency. Furthermore, upselling and cross-selling complementary products or services, creating bundles and packages, and offering discounts for larger orders can help to increase the average order value. Finally, reducing costs, increasing prices, or adding premium features or benefits can help to increase the profit margin.