To calculate your CLV, you must first calculate your margin. In a nutshell, your margin is the difference between the revenue you receive from a customer and all of the costs associated with that customer in a given timeframe. Your margin is then multiplied by your retention rate and divided by one plus your average discount rate minus your retention rate.
The full equation for calculating CLV looks like this:
Customer Lifetime Value = Margin * Retention Rate / (1 + Discount Rate - Retention Rate)
CLV is an important metric to understand when setting and measuring goals for your business. If you’re trying to exceed a specific revenue goal in a given time frame, you’ll need to know your CLV in order to actually achieve that.
CLV to CAC Ratio
Understanding how your CLV relates to the customer rcs database acquisition cost (CAC) is important as well. If you’re spending more time and money acquiring a customer than you receive once they’ve signed with you, your business won’t profit.
If you need to improve your CLV to CAC ratio, you can reduce your CAC, increase your CLV or do both by focusing your marketing efforts on companies matching your ideal customer profile.
Lowering Acquisition Costs
You can reduce the amount of time you’re spending acquiring each customer and streamline that process through methods like a freemium model or product-led growth.
These strategies reduce your marketing investment by making the initial sign-up process for a product as frictionless as possible, allowing the product to prove its own value and convince customers to convert to the paid versions of it.
Additionally, you can reduce your costs by minimizing the amount you spend on less effective channels and focusing more on the channels bringing in the most value.
Focusing on Ideal Customers
You can focus on the types of customer that give you the highest CLV. Ideally, those customers will also be easier to sell to, so you’ll have a lower CAC — and once you do sell to them, they’ll spend the most time and money with you.