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PLANNING
H
ow do companies determine the value cus- CLV is the total sum customer s spend during their
tomers bring to their business? Many firms entire relationship with your company. People
recognize the importance of each specific transac- who habitually buy a certain brand of luxury car,
tion but ignore the significance of future transac- for example, can easily have a CLV of $400K or
tions. Companies with regular billing cycles (e.g., more over the course of their lives. If you consider
phone companies) start looking toward the future expenditures on maintenance, the number only
because they’re almost forced to view customers gets bigger.
in terms of extended revenue streams. What about
companies that offer products purchased on an One simple way to estimate CLV is to do the
intermittent basis? following:
They should calculate how much customers 1. Calculate your company’s average profit per
contribute to company profits over the course of sale. Just divide total annual profit by the
their entire relationship with the company. This number of total transactions during the course
concept, known as customer lifetime value (CLV), of one year.
is a tool that can help managers quantify the 2. Estimate how often the average customer will
real value of customers, calculate how much the purchase from your company. To keep things
company should spend to acquire new customers, simple, you may want to limit the timeframe to
and determine how to behave toward or what to two years.
offer different types of clients. CLV is also an easy 3. Calculate the amount of profit your company
way to illustrate how valuable every customer realizes from the average customer over that
might be to the company in an effort to emphasize two-year period.
the importance of customer service.
For example, if average profit per sale is
$52.32 and the average customer buys
from you 4.2 times over two years, the
total average profit per customer during
that timeframe is $219.74. Some people
might consider this figure a little bit high
because a customer’s first purchase usually
incurs a higher cost to acquire.
Crunching the numbers will tell you a
story. You now know that your company
can spend up to $219.74 to acquire that
customer and you won’t lose money. In
reality, many corporations take a loss on
acquiring new customers because they
know they’ll earn more than the initial loss
0 ThinkBusiness Click Here for Table of Contents April 2009 1
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