What is customer lifetime value?
Customer lifetime value is an estimate of the total amount a customer will spend with your company throughout your business relationship — minus any costs needed to secure that customer, i.e. acquisition costs. These include marketing, advertising, introductory offers, and any other means of generating new leads.
The importance of customer lifetime value
So why does it matter? Calculating CLV is important for a number of reasons. Once you know a customer’s lifetime value, with the help of this metric you can:
Identify customer pain points
We live in a buyer's market, where the customer is queen. A single bad experience with a brand will make 50% of people switch to a competitor. On the flipside, 92% of consumers are more likely to buy from a company again after having a positive first experience.
If your CLV is low (or starts to fall), it could be a sign to invest in customer experience.
Decide how much to spend on customer acquisition
The cost of acquiring new customers is higher than maintaining relationships with your existing customer base — 5 times higher, to be exact. Developing loyal customer relationships can keep acquisition costs lower, and increase revenue over time.
Knowing the lifetime value of a customer helps you decide how much to invest in customer retention, and what to spend on pursuing new leads.
Get to know your customers
By calculating their lifetime value you’ll learn more about your customers: who they are, what they like, and where they spend their money. Armed with this knowledge, you can find out which areas of your business are the most profitable.
Getting to know your existing customers allows you to offer products or services they are likely to want — and will also help identify potential new leads to target.
How to calculate CLV
There are several different ways to calculate a customer’s lifetime value. You can choose to work out the CLV of each individual customer, or focus on a smaller sample group to get a rough idea. Here’s one of the most common methods.
Step 1: Establish the average monthly revenue per customer. Divide the total amount each customer has spent with your company by the number of months since they first shopped with you. Taking the average monthly revenue puts both new and old customers on the same footing.
Step 2: Multiply the average monthly revenue by 12 to get the annual CLV. Knowing the annual revenue will give you a more useful metric. This allows you to make informed decisions when it comes to business strategy.
Step 3: Subtract the customer acquisition costs. Remove all marketing and promotion costs from the equation. Taking away the total cost of acquiring each customer will give you a clearer picture of your CLV.
The problem with this methodology is that historical trends are not necessarily an accurate predictor for future customer behavior. A person’s financial situation can change, they might be persuaded to try out a new brand, or they could have a negative experience when interacting with a company.
Find out how to keep your customers happy
Ways to increase CLV
Lifetime value is all about loyalty. You want consumers to keep returning to your company, regardless of the competition. Here are a few ways to increase CLV:
Create a compelling company brand
Your brand identity isn’t just about strong design choices — although aesthetics are important. It’s the story you tell about yourself as a company: your offering, what’s important to you, and how you engage with the world.
When people connect with this story, they’re more likely to choose your company over rival brands (whatever the competition might offer).
Engage with existing customers
When you create a community of engaged customers, people will keep coming back to your business. Respond to reviews, publish content that has scope for comments, offer spaces where customers can give feedback, and put procedures in place to manage complaints in a constructive way.
Connecting with customers through events, social media, and other channels will reduce churn and help develop long-lasting relationships.
Deliver personalized customer support
Customer expectations are rising. 76% of consumers now expect personalized experiences when interacting with brands — meaning companies are having to raise the bar with their support. People want fast, easy, multichannel support: wherever they are, whatever the time.
Personalized support allows you to organically improve customer retention and build enduring relationships — without resorting to paid promotions or deals.
That’s why creating joyful customer experiences is essential to increasing CLV.