In marketing and business analytics, tracking the performance of your ads or sales efforts is vital for the long-term success of a business. Customer lifetime value is one of the key metrics that can be used to gain an overview of the overall profit that may be gained from each customer throughout their interaction with the business.
Gathering the necessary data, calculating the customer lifetime value, and using the findings to improve upon your previous methodology is not an easy task. That is why we will aim to make this process a bit easier. Let’s take a look at what the customer lifetime value is, how it can be calculated, and how it can benefit your business strategies.
What Is Customer Lifetime Value (CLV)?
Customer lifetime value refers to the value that is attributed to a customer for the entire course of their engagement with a business.
The metric takes into account a customer’s revenue worth and contrasts it with the anticipated time that a customer will be interacting with a company. Although it is challenging to estimate how long each relationship could last, marketing managers can make an educated guess and define CLV as a periodic value.
Various factors impact the length of the relationship that a customer may maintain with a company. That is why it’s important to account for unexpected factors on top of the apparent ones like customer satisfaction.
Key Takeaways
Customer lifetime value is an important metric in the creation of future customer acquisition plans, as well as a predictor of future potential for company growth;
Increasing your average order value is one surefire way to increase the overall customer lifetime value;
Providing each client with a great customer experience may boost customer loyalty, which has a direct positive impact on the lifetime value of each client.
How to Define Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) represents the total revenue a business expects to earn from a customer throughout their relationship with the brand. Understanding this figure is crucial as it guides decisions on how much to invest in acquiring new customers and how much to spend on retaining existing ones.
Calculating the customer’s lifetime value is quite simple. Simply multiply the average order value by the number of expected orders for each customer throughout their relationship with the company.
The calculation may be presented in the form of the following formula:
CLV = Average Order Value * Number of Expected Orders
Another example is a subscription-based company that might calculate CLV by considering not only the subscription price and frequency of renewal but also the indirect revenue from referrals and word of mouth.
This approach acknowledges the compound value a satisfied subscriber may bring over time, including both their direct financial contribution and their influence in attracting new subscribers.
If you are just starting your business and have limited access to industry data, these approaches provide you with a good estimate. However, if you have access to historical data, you may be able to get a more accurate lifetime value estimate.
Why Is Customer Lifetime Value (CLV) Important?
Customer lifetime value is one of the most important metrics to keep track of when planning for long-term sustainability and profitability. It gives a direct overview of the bottom line of a business and its potential for future growth.
1. Guides strategic planning
CLV helps in the development of effective business strategies. Understanding the total revenue a customer can generate allows businesses to tailor their marketing and operational plans accordingly. This strategic guidance ensures that resources are allocated in a way that maximizes returns.
2. Optimizes budget allocation
Knowing the lifetime value of customers makes it easier to determine how much should be invested in acquiring new customers and retaining existing ones. A high CLV might justify increased spending on customer acquisition strategies, as the return on investment is expected to be favorable.
3. Enhances competitive edge
With a solid grasp of CLV, businesses can better navigate competitive markets. By predicting future profitability through CLV, companies can craft competitive strategies and adjust their offerings to not only attract but also retain valuable customers, thereby ensuring sustained growth.
Top Techniques for Boosting Customer Lifetime Value
Boosting the value of each customer is certainly an alluring goal. Still, it requires some planning and careful execution. Try to incorporate some of the following value-increasing methods into your overall customer lifetime value-boosting strategy.
1. Increase the average order value
Increasing your average order value is one of the best strategies to raise your CLV. This can be done in a variety of ways, but one common method is to offer discounts on bulk purchases or purchases of multiple different kinds of products.
2. Improve customer service
Customer service is a large part of the customer experience, and improving upon this area can help the customer feel happy to shop from your business again and again. Providing tailored customer support, a good refund policy, and benefits for existing customers are some good examples of effective customer service.
3. Improve customer retention
Increasing your retention directly increases the lifetime value of each customer. To improve retention, you may do well to avoid outright selling. Your marketing can always enlighten, educate, or inspire by outlining facts and practical applications for a purchased item.
4. Enhance customer engagement
Engaging customers more deeply can significantly increase CLV. This can be achieved through personalized communications, loyalty programs, or engaging marketing campaigns that keep your brand top of mind.
For instance, regular updates about new products, special events, or exclusive content can create a stronger emotional connection with your brand, encouraging repeat purchases and loyalty.
5. Utilize up-selling and cross-selling techniques
Effective up-selling and cross-selling techniques can greatly increase the average lifetime spend of your customers.
Up-selling involves encouraging customers to purchase a more expensive item than the one they are considering, while cross-selling suggests complementary products that enhance their primary purchase.
Both strategies not only increase immediate revenue but also improve customer satisfaction by making their experience more complete.
Additional Tips & Tricks
- Customer loyalty is an important part of a company’s ability to increase its average customer lifespan. Implementing incentives that reward customer loyalty is one great way to positively affect the average customer’s lifespan;
- The average shopper is generally not looking for a great customer experience, but providing each client with a great customer experience is sure to increase their loyalty, and ultimately, the average customer lifespan;
- Allocating some of the revenue for marketing can also have a beneficial impact on customer loyalty, increasing the customer lifespan without the need for a loyalty program.
The Bottom Line
Customer lifetime value is a metric that allows for a closer analysis of business profitability. The lifetime value of each customer is an important statistic to predict the future potential for expansion, growth, and the ways for resource allocation.
From this article you’ve learned what customer lifetime value is, why it is important and you’ve got strategies to increase your CVL metrics. Following those simple tips will surely benefit your business efficiency and make a great impact on customer retention.
Customer Lifetime Value FAQs
Calculate CLV by multiplying the average purchase value, purchase frequency, and customer lifespan. Adjust for gross margin and retention rate for more accuracy.
The two types of CLV are historical CLV, which looks at past customer behavior and spending, and predictive CLV, which uses forecasting models to estimate future customer value.
A good CLV varies by industry but should generally be at least three times the customer acquisition cost (CAC) to ensure profitability and sustainable growth.
Predict CLV by analyzing historical data, using machine learning models, and considering factors like purchase frequency, average order value, and customer retention rates.
