Do you know your Customer Lifetime Value?

As a small business, If your business isn’t striving for future growth, it’s dying a slow death. If you solely focus on the day-to-day metrics like profit, sales, and revenue, you might be missing on opportunity to study trends in your business. What you might want to do is looking for stats that can help you plan for the future – such as determining your customer lifetime value.

What Is Customer Lifetime Value?

Customer lifetime value (or CLV) is defined as the estimated lifetime valuation of a customer as he or she relates to a business. The simplest way to compute CLV is by multiplying together the customer’s average expenditure for each order, the number of orders placed in a specific time period, and the estimated lifetime of the customer. The “customer” can be the average of all customers, the average of a company’s top 20% of customers (by spending), the average of all customers in a particular channel (online instead of in-store), or any other segmented portion of a business’s customer base.

Once a business owner knows its CLV, it can use this figure to help estimate its future revenues and potential expansion efforts like adding a new location or expanding its product line. It’s also a valuable metric for business valuation if the company is considering a merger, a loan, or a new round of financing.

The Hidden Value of CLV

The appeal of customer lifetime value extends far beyond matters of dollars and cents. It also represents the concept that boosting CLV increases how valuable these customers are to the company in ways that are more difficult to quantify.

For example, if a customer (or group of customers) has a higher customer lifetime value than the customers of the company’s competitors, these high-CLV customers are more likely to…

  • Share their contact information with the company.
  • Evangelize for the company online in reviews.
  • Try out the company’s new products or services.
  • Provide helpful feedback and/or good ideas to help the company grow.
  • Collaborate with the company to improve service.
  • Introduce the company to potential new customers.

How to Improve Your CLV

Because of the far-reaching implications of customer lifetime value, it’s clear to see why every company should include CLV maximization in its small business strategy. Here are a few suggestions for how to accomplish that:

1. Run sales and promotions. This applies to businesses that don’t typically discount their products or services regularly. It could be as simple as offering a 10% discount on one future item or service after a purchase.

2. Offer perks. Free shipping is an obvious choice; free installation or a free follow-up inspection also works well. Even a free (yet inexpensive) gift will go a long way toward getting future business.

3. Create loyalty programs or subscription services. Loyalty programs where customers accrue rewards to exchange for discounts are wildly popular right now. You can also repackage your service or product as a monthly, quarterly, or annual contract or subscription service.

4. Enhance your online reputation. Interacting with fans on social media helps form a bond between them and your business. And these platforms make it easier for them to promote your business to their friends and followers.

5. Enhance your digital marketing efforts. Blogs, email marketing, videos and newsletters can help your business stay in touch with your customers. Plus, they’re more likely to remember you when they’re ready to purchase again.

While new customers are always nice to acquire, getting current customers to spend more and build a lasting relationship with your company tends to be more cost-effective in the long run. With all of the benefits that come with increased customer lifetime value, it makes no sense for you to write off this metric as some irrelevant estimate of future earnings – that is, unless you don’t care the future of your business.

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