When it comes to measuring the success of a business, customer lifetime value is important. However, it’s important to understand the true value that each customer brings.
Two commonly used metrics to measure this value are Customer Lifetime Value (CLV) and Customer Annual Retention Value (CARV). I have interjected the word retention to better illustrate this principle.
While both metrics provide insight into customer behavior, they differ in their scope and purpose.
Defining Customer Lifetime Value
Customer Lifetime Value (CLV) is a metric that calculates the total estimated revenue that a customer will generate for a business over the entire duration of their relationship.
CLV takes into account various other factors. Factors such as the customer’s purchasing behavior, the frequency and volume of purchases, and the estimated lifespan of the customer as a customer.
Essentially, CLV helps businesses understand the long-term value of each customer and make informed decisions about how much they should invest in customer acquisition and retention.
Defining Customer Annual Retention Value
On the other hand, Customer Annual Retention Value (CARV) is a metric that calculates the estimated revenue that a customer will generate for a business in a single year.
CARV measures the average revenue per customer per year, and it’s usually used as a key performance indicator (KPI) to assess the health of a company’s customer base on an annual basis.
CARV can be useful for businesses that have high customer turnover rates, such as subscription-based businesses or e-commerce companies that sell low-cost items with high purchase frequency.
By measuring CARV, these businesses can optimize their marketing and sales strategies to maximize revenue in the short term.
Is Customer Lifetime Value The Most Important Factor?
While both metrics are important for businesses to track, they serve different purposes.
CLV is a more comprehensive metric that takes into account the long-term value of a customer, while CARV is a more immediate metric that provides insight into short-term revenue generation.
Therefore, businesses need to use both metrics in conjunction with each other to gain a complete understanding of their customers’ value.
Which Metric Matters the Most?
By understanding CLV and CARV, businesses can make informed decisions about how much they should invest in customer acquisition and retention.
For instance, if a business has a high CLV, it may be worth investing more resources in retaining existing customers rather than acquiring new ones.
On the other hand, if a business has a low CARV, it may need to focus on increasing purchase frequency or (AOV) average order value to maximize revenue.
What Happens If I Focus On AOV and Purchase Frequency?
Ultimately, if you decide to focus on maximizing this years revenue, right now, there’s only two things to you need to do.
Average Order Value
One is to boost average order value. Average order value can be as simple as increasing each sale by a small percentage. Sometimes, these are called order bumps.
An order bump can be anything that compliments the current purchase. For example, for a restaurant, a slice of pie or a specialized drink.
Or another example for a lawn care business, adding in pest control option vs. simply mowing and trimming. Both of these equate to order bumps that greatly affect overall short-term income.
Purchase frequency is pretty much self explanatory. However, in terms of customer retention, it should be first and foremost.
In our previous example for the restaurant, having a customer come by your place for a meal an average of three times a month, vs. his or her normal two times a month, can greatly impact the bottom line profits for that establishment.
As a business owner, you should be laser focused on these two variables of average order value and purchase frequency.
Providing real value with each purchase and communicating your value proposition directly to influence greater return frequency is key.
In conclusion, both Customer Lifetime Value and Customer Annual Retention Value are important metrics for businesses to track.
Using these metrics in conjunction with each other is of great importance. Businesses can gain a complete understanding of their customers’ value and make informed decisions about how to allocate resources. The goal is to maximize revenue and profitability in both the short and long term.
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