Customer lifetime value or CLV refers to the economic value that a customer will bring throughout their lifetime to the business. It stresses on the fact that a customer does not recognise any business in just one time transaction rather a long term relationship will add up to the value of business.
CLV is not about a single customer; it means stepping back to have a look of your consumer base on whole. It means understanding that there are a few who will never come back and some are such who will never leave. On an average, every customer has a typical lifetime and every lifetime has some economic value.
Components of CLV
1. Profit during each transaction
When we are considering CLV, our focus should be on the revenue a customer will bring throughout his life. Considering the contribution margin per unit will be better than to focus on the revenue as it may overstate the customer’s value. Marginal profits or the profit per unit is the most accurate way to know the profit associated with each commodity.
2. Knowing your customer lifetime
For this you need to indulge yourself into some mathematic calculations. If you have a data with you, firstly calculate the retention rate of your customers and then simply divide to know the lifetime of your customer.
Take last year’s customers who still are your customers in this year. For example you had suppose 100 customers in the previous year and 40 of them are again coming this year, then your rate of retention becomes 40%. Once you have arrived to your retention rate, you can calculate the life time of your customer by the formula:
CL= 1/ (1-RR), where RR refers to retention ratio.
In the above example, your CL will be, 1/ (1-.40) =1.6 years.
3. Discount rate
Discount rate is the rate of interest at which you will borrow money in the business. You should also know the real value of the customer’s cash flows in future.
If the value of the lifetime of the customer’s life time is short, the calculations will be immaterial. But if you have longer time horizon, here you will get the real consideration of time value of money. Ignore discounts if any to get the accurate results.
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The next target of e-commerce: Health care
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Major factors influencing the online healthcare services
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