Why You Should Be Calculating Customer Lifetime Value

Customer Lifetime Value (CLV) is an invaluable metric to any business because it tells you which customers spend the most at your business and which ones you’ve retained for the most extended amount of time. 

CLV is a calculation that determines how much a customer is worth to a company over time. The longer the customer engages with the company, the higher the CLV. 

The basic formula for calculating the CLV is simple enough. The formula will give you the revenue you can expect, within reason, an average customer will create for your company throughout their relationship with you.

CLV = Avg Customer Revenue x Avg Customer Lifespan

Now that you know what a CLV is and how to calculate it, let’s focus on the “why” the metric is beneficial for your company’s success. Calculating an accurate CLV for customers will impact four big areas of your ag retail business:

1. Annual Revenue
2. Prospect Identification
3. Customer Retention 
4. Customer Acquisition  

Impact Annual Revenue

The CLV identifies the customers that contribute the most revenue to your business. This allows your sales teams to serve those existing customers with products/services that will make them happier, resulting in them spending more money at your company.

This is where implementing customer satisfaction programs can be super helpful. Example programs could include early sign-on discount programs or additional in-field time opportunities with your sellers. Anything to make customers happy. 

Take time to think through what a satisfaction program would look like and what your company can follow through with the utmost efficiency. Implementing a program that your team can only deliver on partially will likely do more harm than good. 

Zero In On Target Customers

Knowing the lifetime value of a customer will help you develop a strategy that only targets customers who spend the most on your business.

Knowing the CLV of a customer will help you determine where your sales team needs to focus its energy and resources. These potential customers will be the ones that are interested in your product or ones who typically repurchase from your company. Those are the customers that you want to retain!

Improve Customer Retention

When a company consistently provides value through customer support services, quality products, or loyalty programs — an increase in customer loyalty and retention typically follows. With more loyal customers comes a lower turnover rate and increased referrals, positive reviews, and sales. 

After all, loyal customers create customers. People buy from people, not companies, so customers will be more likely to encourage others to purchase from you if your company can build solid relationships. 

Reduce Customer Acquisition Costs

Acquiring a new customer can be very costly to your company, costing between five and 25 times more than retaining an existing one. The CAC is the cost of convincing a potential customer to buy a product or service. 

CAC can be calculated by dividing the costs spent on acquiring more customers by the number of customers acquired when the money was spent. 

EXAMPLE:

If a company spent $500 on marketing in a year and acquired 500 customers in the same year, their Customer Acquisition Cost is $1.00. 

Alternatively, if a company spent $500 on marketing in a year and only acquired 10, the CAC then becomes $50.00. 

You and your sales managers must identify and nurture the most valuable customers. By doing so, your profit margins, customer lifetime values, and customer acquisition costs will all be positively impacted. Use the formulas and model provided here and start calculating CLV for your business today.

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