How To: The Customer Lifetime Value Formula and How to Calculate ROI
Businesses need to invest a lot of money into marketing if they want to attract and retain customers. Marketers need to work to keep the customers engaged and entertained by posting regular content and analyzing their behavior and preferences relative to the brand and products.
Not all customers offer equal value so it’s important for businesses to prioritize customers and demographics that offer maximum return on interest. For that, you need to calculate the customer lifetime value and come up with a content marketing strategy based on the data collected.
What is Customer Lifetime Value?
The customer lifetime value is the approximate projected revenue a newly acquired customer might provide over their lifetime as a customer. This concept looks at the future value of the customer instead of the past profitability. Unlike other metrics that focus on short-term profits, the customer lifetime value encourages firms to focus on developing good relationships and associations with their customers. This ensures that customers get the best possible service and you have a base that will provide consistent revenue.
This metric will also help you decide how much you should reasonably spend on your marketing to get returns on your investment. Some businesses spend too much money on marketing and don’t get enough income from their acquired customers.
How To Calculate Customer Lifetime Value?
There are many ways to calculate customer lifetime value. Some of these methods lead to vague predictions that provide very little value. Other customer lifetime value formulas are more sophisticated and provide better results. There are several factors involved in determining the lifetime value so it’s a good idea to hire a professional to help you. Here’s a step by step method to determine the customer lifetime value:
- Average Variables – Before you calculate the customer lifetime value, you need to determine the current value of each customer. You would have to create a group of customers. Five to ten customers should be a reasonable number to get an accurate average. Determine the average amount spent per visit and the average number of visits per week. The current value of the customer per week (a) would be the average spends (s) multiplied by average number of visits per week (c).
- Identify the Constants –The next step is to determine the average customer lifespan(t), customer retention rate(r), profit margin for every customer (p), and rate of discount or interest rates of the discounted cash flow analysis (i). All of these variables are required if you want to calculate lifetime value (m).
- The Formula – Most companies use a number of different formulas to get the best results. The traditional lifetime value equation is m(r/1+i-r). This formula will give a fairly accurate prediction of the future customer lifetime value equation. There are other, easier or less accurate ways to calculate the customer lifetime value and you can find them with a brief Google search.
The customer lifetime value is just one metric out of many that you should keep track of. The more information you have on your customer’s behavior and potential, the better your marketing plans will be.
If you find that your customer lifetime value is too low or that the customers have a short association with your brand, you can use marketing to improve the value. Customers directly associate with content so you should shift focus to content marketing.
Why Content Marketing?
Content marketing doesn’t just lure customers to your website, but also helps retain them. Great content with relevant keywords will rank high in search engines and consistently draw traffic to your website. If you keep posting good content, you’ll develop a good reputation, which can help you improve customer value. After all, the customer that keeps coming back to your website and is engaged by your brand is more valuable than an occasional window shopper.
However, content marketing isn’t as easy as it sounds because search engines have implemented stricter rules to control quality. You need to constantly improve and optimize your content to get the best results. Some business owners don’t realize the full potential of their content and fail to keep track of their campaign’s performance. You should measure content ROI regularly to determine if you’re on the right path.
How to Measure Content Marketing ROI?
Content marketing shouldn’t really be measured in dollar value because that’s not its true purpose. This strategy is used to draw customers to your website and establish your reputation. The latter can’t be measured or tracked easily but the former requires basic analytics to determine.
You can determine the dollar value of content marketing ROI by comparing the amount of traffic each piece of content generates and the average revenue per customer on that batch of traffic. Here are some things you should measure when you want to determine ROI of the content:
- Exposure – Measuring exposure is simply a matter of looking at the numbers in Google Analytics. This platform will provide all the information you need about when, where, and how your target audience reach your content. As the tracking code is placed on every page of your website, Analytics will tell you how many people visit your content page and also how many of them move on to visit other areas of your website. You should also keep track of your content published on other websites to determine the right level of exposure.
- Social Shares – You should also keep track of social shares. If you’re not concerned with the dollar value of these shares, you can simply look at the number of people who have shared your content on different forms of social media. However, if you want to know the dollar value, just create post engagement ads on Facebook, Twitter, and other such social media platforms. Choose a big amount that fits into your budget and let the ad go live. People will click on these ads to like your content and that will allow you to determine the proper dollar value of your social shares.
- Backlinks – If your content is interesting and informative enough, it will be used as research by other content creators. They will link back to your content and bring more traffic to your website. Any effective link building tool will help you determine just how many people link to your content and how much exposure you get from every link. If you hire an SEO expert to do link building for you, the amount you spend per link on average will be how much converting traffic it brings; this will help you measure ROI.
- Leads and Sales –Measuring leads and sales that originate from your content is very easy, especially if you place internal links in your content to direct your prospects to products or services relevant to the topic mentioned. You can set Goals on Google Analytics to determine leads and sales your content generates and know the dollar value of ROI.
A good balance between the customer value and the content marketing ROI shows that you’re on the right track with your marketing. You should keep an eye on the two metrics to ensure they continue to perform well.
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