Understanding Customer lifetime value allows you to make better sales and marketing decisions. It also helps you make predictions about your customer’s purchases for future reference. You can then market and target your customers accordingly.
In this article, we will discuss customer lifetime value and how to calculate it. We will also discuss some useful examples and tips that you should be aware of.
In pochi punti:
What is Customer Lifetime Value?
Customer Lifetime Value or CLV is a marketing measurement tactic. It reflects how much an individual client spends on your company during the span of their life. This could be by purchasing your services or products. Customer satisfaction and retention are central to CLV.
So, retaining your current clients and boosting their lifetime value is a great way to expand your company. A happy customer will bring more profit to your business if they stay with you for a long time.
Benefits and Importance
It is very important to retain customers rather than keep hunting for new ones. To convince you of this, here are some benefits of customer lifetime value.
- Current customers will spend more than fresh clients. According to some studies, customers that you already have, spend more than newer clients.
- Current customers are cost-effective. Retaining customers is much less expensive than obtaining new ones. For you to gain new customers, you need to reach out to them. Guiding them through a buyer’s journey as well as getting them onboard is expensive. But, existing customers have already gone through these steps. Thus making it easier and less expensive.
- Current customers will purchase again. If your customers are happy with your brand they are more likely to buy again. Marketing to your existing customers has a 70% chance of success. But, in the case of new ones, the probability is around 5-15%. In addition, by slightly increasing your customer retention, your profits also increase by a large margin.
Customer Lifetime Value Calculation
In order to measure your Customer Lifetime Value, you first have to calculate these numbers:
- Average purchase value: You can find this number by dividing the total revenue of your company in a certain period by the number of purchases made in that period.
- Average purchase frequency: You can find this number by dividing the overall purchases made by the number of unique customers who made purchases in the time period.
- Average customer lifespan: You can get this by finding out the average number of years a customer keeps buying from your business.
- Customer lifetime value: You can get this number by multiplying the average purchase value by the average purchase frequency. After that, multiply that number by the average customer lifespan. This allows you to identify the total revenue you can expect to get from any customer over a period of time.
Once you calculate these numbers you can find out an accurate customer lifetime value.
The formula for CLV:
Customer Lifetime Value = (Customer Value x Average Customer Lifespan)
In this case, Customer Value = Average Purchase value x Average purchase frequency
Therefore, CLV = APV x APF x ACL.
Here is an example:
If you take a professional athlete who purchases shoes from your brand. This runner may be worth: $250 per pair x 6 pairs a year x 6 years.
So, $250 x 6 x 7 = $9,000.
An employee in an office may be worth: $50 per pair or shoes x 5 pairs a year x 4 years = $1,000.
In this way, you can understand who you should target your marketing and promotions towards.
How to Increase Customer Lifetime Value
Here are ways you can increase your customer lifetime value.
- Start a customer referral program. These programs help you to increase your customer lifetime value. A customer who is referred has a high lifetime value as well as less churn. Also, most people trust reviews and recommendations from customers who they know. Besides that, customers also like to share fresh purchases on their social media. In this way, you can boost your CLV and also get added benefits like potential customers. These customers can then be turned into lifetime customers.
- Customise and target your campaigns. EmailAn email (or electronic mail) is a method of exchanging communications through the internet. It is one of the most used features on the web and the number one mean... marketing is the most impactful tactic to retain customers. More than half of digital marketers believe this is true. But, many companies don’t succeed in sharing meaningful material. Instead, they restrict themselves to robotic campaigns. These campaigns don’t offer any actual value. By targeting and personalising your campaigns you can focus on certain customers. This also helps them engage with your content since it is tailored to them.
- Boost your customer service. Customer service is the best way to retain customers. A customer who has a great customer service experience is more likely to stay with your company. This in turn improves your customer’s lifetime value. Ensure that your company is active on maximum number of social media platforms. You can provide great customer support through these channels. Besides that, you can look into what channels they use more and provide 24/7 live chat support. If you can’t do that, then you should reply within 24 hours at least.
Pros and Cons
Here are some pros of Customer Lifetime Value:
- CLV is helpful for more precise financial projections for your company. It also helps you make better marketing strategy decisions.
- It shows you how much profit a customer can bring you over their lifetime. CLV also gives you clarity over acquiring customers and its marketing costs.
- CLV allows you to see how you can improve your customer relations. It also helps boost your customer lifetime improvement tactics. You can review order value, buying frequency as well as past data.
Here are some cons of Customer Lifetime Value:
- The main drawback of CLV is that it is difficult to predict the future. Even with the best data, you still can’t predict what exactly a customer will do. Besides that, there are other obstacles like situations that are out of your control. For this reason, CLV is a great map but not the exact truth.
- Another thing is that CLV needs a lot of time invested into its operations. Some companies may have the resources to do so but others may not.
- It is also challenging to control the entire experience a customer may have with your brand. For instance, if there is a mistake with customer service or providing a service, you can’t predict that the customer will stay with your brand.
Here are some tips for you to keep in mind for customer lifetime value.
- Develop a relationship with your customers. When customers are fans of your brand, they are more likely to purchase more. They will also agree to promote you and share your brand. Thus it is important to build relations with them and cater your content towards their needs. You can do this through your social media content, blogs or email marketing.
- Use cross-selling techniques. If you sell products and services that complement each other, use different price tiers. For instance, a company that wants to buy a web domain would be interested in other services you may offer. Such as privacy protection services and web hosting.
- Offer discounts and rewards for bill extensions. An annual billing cycle helps to predict and forecast revenue. This helps you while making decisions in the future. To make your customers extend their cycle, you should provide them with an incentive. For instance, offer discounts or limited free usage.
- Upsell your products and services. You can charge depending on the usage of the product. For instance, you can offer customers the option to upgrade from the basic software plan to an advanced (and more expensive) one.
All of those things can help you increase your customer lifetime value.
Here are some great ideas if you’re looking to improve your Customer lifetime value.
- Put your customers first. You can gauge their happiness by observing how your business is performing. But, in order to get an accurate record of their satisfaction, you should collect data. For this, you can send out a survey. It can include things like:
- Would you recommend this product to a friend?
- Rate your satisfaction with this service on a scale from 1 to 10.
- What can be improved about this product? (give examples)
- Is there any added feedback regarding this service?
- Make content to engage your customers. Content marketing is not going anywhere. It also helps make your customers feel more engaged and closer to your brand. When creating content, remember to focus on the customer’s pain points. This can increase your CLV and reduce your costs to gain new customers. Your customers will stay loyal to your brand for a longer period if they have a relationship with you. They will also help promote your brand through word-of-mouth and social media channels.
- Reward customer loyalty. If you want to ensure your customers stay loyal to your brand, then reward customer loyalty. You can give them special offers or free shipping. You can also offer them access to exclusive and limited items. You can find out the loyalty of a customer by calculating their customer lifetime value.
- Encourage customers to change to an annual billing lifecycle. If your product or service is recurring, then you can try to convince your customers to switch to an annual cycle rather than the monthly one. This helps to reduce churn since customers will commit to using your product or service for longer. This results in a higher CLV and once a customer commits they will likely stick on.
Top Customer Lifetime Value Examples
With data from Kissmetrics, Starbucks is a great example to calculate the CLV of 5 customers.
- Starting with the Average Purchase Value. An average customer spends around $5.90 per visit. If you visit Starbucks 4 times a week, you would spend a total of $20. Thus your APV is $5. You can then repeat this process 4 more times.
- Now for the Average purchase frequency. For this, you need to find out how many times an average customer visits Starbucks. The average found across the 5 customers was 4.2 visits. This makes the APF 4.2.
- Next is the Average Customer Value. For this number, you need to look at each of the 5 customers separately. Then you will multiply their APV by their APF. This shows you the total revenue gained from the customer each week. You can then repeat the calculation for all 5 customers and then get the result of $24.30
- For the average customer lifespan. You need to find the number of years each customer visits Starbucks and average it. From the study, we get the number as 20 years. Or you can also do this by dividing your churn rate percentage by 1.
- Finally, the Customer Lifetime Value. Since you’re measuring customers each week, you need to multiply the customer value by the total number of weeks. In the case of Starbucks, you will multiply the average customer value by 52 (weeks).
So, CLV= 52 x 24.30 x 20. Thus, the total Customer Lifetime Value of 5 customers is $25,272
Customer Lifetime Value is important for the growth of any brand. Instead of tracking just the initial customer purchase journey, CLV allows you to look at the big picture. You can then invest more money and make helpful changes to your customer’s purchase journey.
The formula for calculating Customer Lifetime Value: Customer Value x Average Customer Lifespan.
For this, there are a number of things you should also do to improve your CLV. Give your customers a place to share their feedback. This is important for them to feel appreciated and also improves their customer loyalty. You should also listen to what your customers want.
Did you find this article helpful? What are other ways you can increase your customer lifetime value? Let us know in the comments section below.