Customer Lifetime Value (CLV)

Customer Lifetime value (CLV) is a pretty simple, yet important and powerful, concept. Basically, you’re asking this: How much profit can I expect to see from my relationship with an average customer?

At the basic level, this is an easy calculation. Let’s take the publisher with a single product:

Cost to Customer – Cost of Product to Publisher = Profit per Sale

If I am selling a book for $25, and it cost me $7 to produce that book, then my profit per sale is $18. For the single-product publisher, then, the CLV is $18.

But what about the publisher with multiple products?
You can measure CLV in a few ways. If you have a complete record of each sale, perhaps because you capture every customer email, then you can simply divide your total profit (revenues – costs) by your total number of customers.

Most publishers aren’t that lucky, though, so we get to estimate. Let’s use the example of the three-product publisher.

Product #1
MSRP: $25.00
COGS: $7.00
Profit: $18.00

Product #2
MSRP: $50.00
COGS: $27.00
Profit: $23.00

Product #3
MSRP: $4.00
COGS: $0.80
Profit: $3.20

Now… let’s assume that the publisher knows that 75% of customers that buy Product #1 also buy Product #2, and 50% of those same customers also buy Product #3.

Calculation of Value for Product #1
$18.00 * 100% = $18.00

Calculation of Value for Product #2
$23.00 * 75% = $17.25

Calculation of Value for Product #3
$3.20 * 50% = $1.60

Total Value: $36.85

In the end, this publisher can reasonably expect that a new customer that purchases Product #1 will mean more than the original $18.00 in profit. In fact, this customer will mean an average of $36.85 in profit.

This is a basic look at CLV.

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