How to Calculate Customer Lifetime Value4 min read
Calculating Customer Lifetime Value (CLV) can prove to be quite useful for all sorts of businesses and industries. Knowing the value your consumers can potentially contribute over a lifetime can help your business with its strategy going forward. In her latest for the PERQ blog, marketing & PR expert, Lauren Littlefield, explains how businesses can calculate customer lifetime value.
I hate math. Seriously. It’s been a rocky road from pre-algebra to calculus for this gal. Imagine my surprise and resulting panic attack when I found out marketing involved mathematics. And while my disdain for math hasn’t really gone away since I graduated college (with a degree in communication, of course.) I have learned that some equations are worth understanding, so here is my explanation and direction on how to calculate Customer Lifetime Value (CLV).
CLV is the value a customer contributes to your business over an entire lifetime. For a lot of companies today, especially ecommerce, CLV can be tricky if customers are using different email addresses, shipping to work instead of home, or using a spouse or roommate’s name to make a purchase. However, CLV has always been a strong indicator of success for the automotive industry.
CLV has always been a strong indicator of success for the automotive industry.
Many consumers return to the same dealership again and again for their car purchases. Sometimes it’s because it’s the only dealership selling a particular manufacturer or make in an area. But more often than not it’s because the customer feels a strong sense of loyalty to the dealership. Perhaps they even see the same salesperson every time they go in to look at vehicles. At Right On Interactive, we call that engagement. Over time, engagement builds relationships and relationships build revenue. Car dealers are historically great at making and maintaining relationships, so CLV is a metric that is not only calculable but critical to the long-term success of the dealership.
How To Calculate CLV
OK, now onto my favorite part (do you feel the sarcasm?), the math. Here’s the equation for calculating historic CLV:
Historic CLV = (Purchase1+Purchase2…+PurchaseN) x Average Gross Margin
What’s important to note with the above equation is that it calculates CLV based on net profit, providing the actual profit a customer contributes to a dealership.
As for predictive CLV, well, it’s a little easier said than done so I’m simplifying this quite a bit. There are a lot of predictive CLV calculators so I recommend reading up on the topic if you’re looking for something a bit more complicated. Below is a “simple” predictive CLV equation that I have come to understand and share with others. Let’s start here.
Predictive CLV = ((T x AOV)) AGM) ALT
T = Average annual transactions
AOV = Average order value
ALT = Average Customer Lifespan (in years)
AGM = Average Gross Margin
Remember, predictive models like the one above will never be 100% accurate because they are forecasts; however, they still assist in the planning for a dealership’s marketing strategies, campaigns, tactics, and budget.
I wish you well in calculating your customer lifetime value. Hopefully, you’re a bit better at math than me! If you’re interested in increasing your dealership’s CLV, I recommend downloading “What is Lifecycle Marketing?” to learn more about winning new business, keeping the business you already have and growing them into something much more profitable over time.