How to calculate the long-term value of new customers (CLV)" @click.prevent="open = !open" class="no-underline border-none">
It's easy to calculate the value of a single sale, but to really understand how valuable a single new customer is to you, you need to consider the value of their future relationship with you. How many purchases does a customer make in the course of their full relationship with your business? And how long is that relationship with you, on average?
Considering these questions will give you the Customer Lifetime Value (CLV). Perhaps you sell a monthly subscription, where customers pay you R1,000 or £100 per month, and customers stay with you for 2 years on average. You spend R100 or £10 per month to service the customer, which includes your initial cost to get the customer. The total revenue you will get from a customer in a year would be R1,000 or £100 * 12 months = R12,000 or £1,200. And the cost would be R100 or £10 * 12 months = R1,200 or £120. A simple formula for CLV, from Qualtrics, is the following:
Customer revenue per year * Duration of the relationship in years - Total costs of acquiring and serving the customer = CLV
In the example above, the CLV would be: (R12,000 or £1,200) * 2 years - (R1,200 or £120) * 2 years = R21,600 or £2160
Note: this is the simple way of doing it; you can make this calculation a lot more nuanced by calculating different CLVs for different segments, adding some sort of discounting for inflation, and so on. Here is a great guide to CLV from Qualtrics.
Knowing your CLV gives you a better tool to benchmark your spending on a website. If you're expecting to get R4,000,000 or £200,000 in new customer relationships, it makes sense to spend R200,000 or £10,000 on the website that will help you achieve that. But if you're only expecting to get R500,000 or £25,000 in new customer relationships, that same calculation might not make as much sense.
To cater for different scenarios, you can formulate low, medium, and high ballparks for the expected value, e.g. CLV and employee costs saved. To do this, you can ask: (i) what could this number be in a worst-case scenario, (ii) what could this number be under normal circumstances, and (iii) what could this number be in a best-case scenario.
If the problem you're looking to solve is hard to quantify, it may be easier to look at the downside than the benefits. For example:
Get web industry insights delivered straight to your inbox with Entle's monthly newsletter.Subscribe for free
Now that you know your "why" and have a rough idea of what it's worth to you, it's time to approach web agencies for a ballpark costing. Website costs will typically be divided into the three distinct phases of a website project:
While these three phases form the basis of any website project, the exact offering in each phase can be tailored to your budget and unique circumstances.
A good web partner won't lock you into development before completing web strategy. Since the strategy phase informs so much of what follows, and since the final requirements are only clear after this, a good web partner won't require you to commit to development upfront. Instead, they will provide an accurate, obligation-free quotation for the development and ongoing services after having completed strategy. For example, at Entle we offer web strategy as a standalone service. This gives our clients a low-risk way of starting their relationship with us and assessing the best way to go about their project. The deliverable of our strategy process is a project brief with our recommendations. This becomes a valuable blueprint for the client's website, no matter with which vendor they choose to go for the development and ongoing services.
Looking for a quote from Entle? Entle websites normally start around R70K / £3,500. To get a quote for strategy and a more detailed ballpark for development and ongoing services, book a free call with Entle.
Once you have ballparks or quotes from your preferred vendors, you should do a detailed comparison to check which vendors are the right fit. But more than just looking at something that meets your concrete website requirements and that meets your budget, you should consider broader questions about the vendor, their process, and how they can reduce your risk. Considering these factors will help you understand which vendor can create the most value for your organisation.
You've built a convincing argument for a new website and your organisation's management has agreed to allocate the budget for it! Exciting times! While a lot of work will go into the process to develop the website, a good web partner will make it fun and exciting and help you keep your eye on the prize.
Once your website is live, don't forget to measure its impact on your key metrics, as you defined them during the strategy phase. Being able to demonstrate the success of the project and the return on your organisation's investment builds credibility and helps you establish a track record with your management. This will make it a lot easier to convince your stakeholders the next time round.
Best of luck with your project!