Numbers gives you business superpowers, you should be Using customer lifetime value as one of those numbers.

In this podcast I will

• Firstly, break down what CLV is
• Secondly, how you can go about calculating it for your own business.
• Lastly, why it's important

So, whether you're just starting out or you've been in business for a while, listen to find out more!

If you're in business, it's important to know how much each of your customers is worth. Knowing your customer lifetime value (CLV) can help you make more informed decisions about where to focus your marketing efforts, and how much to spend on acquiring new customers.

Conclusion

So, there you have it! Using customer lifetime value in a nutshell.  It’s an incredibly powerful number that can help your business in innumerable ways, so make sure to start calculating it today.

In the next part of this series, I’ll take a deeper look at CLV, its power, use and what you need to do to use it.  Listen if you want to increase your profits and get a better understanding of what else is possible when you wield this metric effectively.

Are you excited? I know I am! If you can't wait for more, go ahead and listen to the rest of the podcast episode where we deep dive into all things CLV. You won't regret it!

Check this link to learn more about financial statements.  I invite you to join my Numbers Know How Financial Story Plan Community. I’d love to have you there!

Check out my I Hate Numbers YouTube channel,  Subscribe to I Hate Numbers now so you don’t miss an episode.  My book, I Hate Numbers will change your relationship with numbers and money, in a good way.  Check out what people have said, buy the book and make your own mind up, you won’t be disappointed.

A very powerful metric that is often under use, often under deployed, is the customer lifetime value. The beauty of this metric is that it can be used for any type of organization, whether that's a private business, whether that's a social enterprise an hours based organisation does not make any difference what your organisation is. You can calculate customer lifetime value.

In this podcast, I'm going to talk you through what a customer lifetime value calculation looks like, why you should bother doing a customer lifetime calculation for your business and how we can deploy and use it. This is part one of part two. In part one, I'm going to be laying out the foundations, the framework, going through some illustrations of how this metric can be used and calculated. And in next week's episode, we're going to dive deeper to liberate and see the power of this wonderful metric.

You're listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. Welcome to another episode of I Hate Numbers, the podcast that's got a mission to help you and your business grow by increasing your financial awareness, helping you make more money, save tax and time. What's not to love about that? Let's crack on with the podcast. Firstly, let's have a look at the idea, the concept of what lies behind customer lifetime value. Our customers, our clients, if we prefer to use that term, are the ones that ultimately generate the revenue, generate the value for our business that enables us to deliver our why, make money, make profits.

And though we shouldn't see customers purely as commodities, purely as monetary units, it's important that we have a positive relationship about making money from what we're doing, from what we're delivering. A customer lifetime value looks at a customer by individual customer, by grouping, by segment, and actually identifies the value to us in profit terms over the lifetime of having that client. So the moment they sign up to the moment they leave us, and they will leave us at some point in the future, we can calculate the level of profits that we generate from that relationship. Why that should be important?

Well, if we know the value that we're generating, the profits that we're making off that customer relationship, that enables us to see how we're progressing. Are we deploying the resources in the right place? Should we be making more investments to retain that client relationship so that, inside that power is much greater once we have an idea of what that metric looks like. How do we actually go about calculating the value? How do we go about calculating customer lifetime value? There are a few things that we need to have at our disposal.

There are a few things that we need to identify and isolate if we're going to take meaning from this particular metric. Now, the customer lifetime value typically is calculated in two phases. First of all, we calculate the level of revenue or the level of income, the level of sales that we generate from that individual customer over the lifetime. So we need to have some idea, effectively, of what the average transactional value the average sale value is for each one. In a short while, I'm going to be going through customer lifetime value and I'm going to be demonstrating with three distinct businesses how the calculation is done.

If you want to check out the show note, folks, there's a link here to more visual illustration of the customer lifetime value calculation. So we need to know what the average transactional value is. We need to know how many transactions we enter into, typically over a year with that customer. We then need to understand and get a figure that represents how long that customer stays with us. What's the retention period? It will be great to think your customers stay with you for life. All businesses, myself included, will experience what's called churn. The nature of what you offer could be that there's a short period of time that we retain that customer. Now, those first three numbers, the average sale value multiplied by the number of transactions that are carried out in a year,

multiplied by the retention period, typically expressed in years and months, will give us the lifetime value in terms of fees or in terms of turnover, in terms of sales. I'm deliberately using a variety of terms, by the way, because in business, in the world of numbers and accounts and finance, different terms are used to describe the same thing. The next thing we need to identify is what is the average gross margin, the average profits that we make from that transaction. Value times gross margin percent, for example, will give you the customer lifetime value, which is what we're after. Let's throw in three examples.

The examples I'm going to be using are for an Arts Cafe, an arts organisation that has a cafe that it runs alongside its gallery. We've got a car dealership that will have a higher ticket value and also a membership organisation. This membership organisation, the Financial Story Planning Club, has a membership programme where it's charging its members a monthly fee. So let’s look at each one in turn. There are some background information for the Arts Cafe. The Arts Cafe knows that the average transactional spend by somebody coming into his cafe is an average of £10. They know that the customer is quite low. They use it as an experience, place they come in, they get relaxing environment and atmosphere,

and typically they pop in twice a week, 48 weeks of the year. And they know that there's 96 transactions from that one individual customer. And the retention period before the customer either be that they've moved on, they've decided their change of life is such that they’re not for a drink in a cafe anymore is five years. In that situation, £10 for each transaction, 96 times in a year, typically a five-year retention period. If we cross-multiply all those figures, that gives us a lifetime value of 4800. Now, the cafe owner also knows that based on the food and the drinks they're serving to the customer, they make an average of 70% gross margin.

If you check out the show note, folks, by the way, I'll give you a link to gross margin, where we've published and talked about this on a previous podcast episode. 70% of 4800 gives you a total of £3360 of customer lifetime value. Probably far bigger numbers than we'd anticipated. Now, let's look at the car dealership and go through the same mechanism. The car dealership sells new cars. The average value of each car sale is £35,000. Typically, somebody buys a car every five years and the average customer, the average client for this dealership, buys a car twice from this particular dealership.

If we take those same figures, 35000. If you're buying a car every five years, that's 0.2 of a transaction per annum. Sounds a bit weird, but that's how it is. Ten year retention period gives you £70,000. Now, you may have other ways to get that figure, but what you need to know is, over the lifetime of keeping that client, what's the value that we generate by way of sales? The 30% margin has been estimated for this car dealership. That means it makes £21,000 worth of gross margin in that relationship.

Lastly, let's explore the membership. The Financial Planning Story Community has a monthly membership. Currently it’s charging £30 per month. Its members typically pay monthly and that's twelve membership payments in an average year. So that's twelve annual transactions. The retention period for their members is three years. So over the lifetime of that member, that's £1080. Now to complete the cycle, take into account the matched and direct cost of this membership. The average gross margin is 90%, which gives a customer lifetime value in profit terms of £972.

In next week's episode, we will dive deeper here to actually discuss allocating and offsetting any additional costs in respect of these customers. Now, it is a metric, folks, that you should give attention to due diligence. If you consider what the total investment by the customer is with your organisation, with your business, you know the value they have with you and you can understand better what you need to do to deploy resources, energy and effort to actually recruit more customers, as well as retaining more customers as well.

In next week's episode, we're going to expand this metric a little bit, more details. It's more important this week to get a handle on what's going on and how we approach this metric. Folks, if you want to get more insight, more information about looking after your numbers, about understanding what goes on in the world of business and improving your own awareness, then I'd obviously recommend my book I Hate Numbers. That's going to give you a much more powerful, easier, and rewarding relationship with your numbers.

I hope you found this episode useful. I'd love it if you could make a grown accountant happy and leave a comment, leave a review. There's a link in the show notes to do such a thing. Make sure you subscribe to future episodes and we can keep you in the loop. We can keep you updated with information that's going to help you and your business make more profit, save tax, save time, and increase your financial awareness. And also those battles that goes on between your ears. Folks, until we meet again, until we speak again, have a go and work out your customers’ lifetime value.

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