Today we will be discussing what Customer Lifetime Value is and how you can improve your overall CLV.
For many companies, short-term results look good enough – but this is a mistake. It may be tempting to measure success through one-time purchases, and it might seem like the only way to achieve a more guaranteed chance of generating profits in the long run.
However, if this is all that’s emphasised in your business, you are neglecting the long-term benefits of having an invested customer, resulting in costly efforts to acquire new customers for every single purchase.
This is why Customer Lifetime Value (CLV) is considered a critical metric for companies.
By measuring and including it in your plan, you are able to calculate the revenue from each existing customer. Instead of bringing in more customers who you haven’t convinced yet to become loyal consumers of yours, it is better to consider that your repeat customers are your best customers. As they’ll be the ones to stick around long enough to make future transactions.
This will help your business to build momentum and achieve sustainable growth.
Below we will be sharing what customer lifetime value is, its importance to businesses, how to calculate it and the ways to increase customer lifetime value.
So lets get into it..
What is Customer Lifetime Value?
Customer lifetime value, or CLV, is a metric that quantifies how important a customer is to your company over time. It takes into account all of the customer’s expected spending with your company over the course of their relationship with your business.
Understanding CLV is essential for any company that wants to maximise the lifetime value of its customers. If you want your company to grow sustainably over time, then it will need to generate more value from existing customers rather than relying on acquiring new ones. This way, businesses can save money because they won’t have to spend too much trying to acquire new customers. As established earlier, this is more costly compared to executing various efforts to retain existing customers.
It is important to take note that not all of your consumers contribute the same value to your company. Some of them actually provide higher value to your business. Thus, you can use this to gauge which customers to prioritise on retaining, as they are more valuable to your business.
With everything mentioned above, having a higher CLV is better for your company as it is likely that you have built a loyal customer base who love the value you offer to them. Of course, with customer loyalty like this comes repeat sales.
The Importance of Customer Lifetime Value for Your Business
- Increased Profitability and Lowered Costs
Since the customer lifetime value represents the revenue from each of your customer’s expected spendings with your company over the course of their relationship with your business, profit margins and costs are surely affected by this. But how?
First, if you solely concentrate on conversions from new customers, every purchase will result in extra marketing expenses. However, if you’re getting repeat purchases from customers that you have previously acquired, this eliminates the need to pay for them again.
Second, your repeat customers are more likely to spend on your items, allowing you to have a stream of recurring revenue from each of your customers. In turn, this allows room for further developing your business. But we’ll discuss this later in another section of this article.
Third, if you take care of your frequent buyers, the more they are likely to become loyal to your brand, resulting in more profits.
In essence, you don’t need to put the majority of your budget into unnecessary customer acquisition costs, since you will be able to determine the amount of revenue you will generate by optimising your customer lifetime value.
- Assists With Your Targets and Strategies
Besides achieving an optimal net profit for your business, understanding and thoroughly grasping your CLV, can help you:
- Identify the right marketing goals or strategies for both customer acquisition and customer retention
- Be guided on how your business will be executing its marketing efforts
- Plan how much to spend for acquiring new consumers who are more likely to be loyal customers, resulting in increased customer lifetime value
- Spend more on brand loyalty activities for customers with repeat purchases
- Distinguish customer segments or target customers that are valuable to your business, helping you know which ones are worth spending time with and resources for
- Accurately answer the question: “Does your current customer acquisition and customer retention strategy support sustainable growth?”
- Strengthens Customer Relationships
As mentioned in the previous section, knowing the lifetime value of your customers enables you to spend more of your time and budget on effective measures which improve customer retention rates. Through this you can maximise customer satisfaction, resulting in making a profit off of the long-term value of each customer relationship.
By understanding your CLV, your company has the data to make changes to your current customer relationship management strategies and value-creating measures that foster customer loyalty, especially to your high value customers.
How to Calculate Customer Lifetime Value
To calculate CLV, you’ll first need to identify several numerical figures. Below are the steps to do so:
- Step 1: Determine the Average Purchase Value
Formula: total revenue divided by the number of purchases in the same time frame.
- Step 2: Compute for the Average Purchase Frequency
Formula: take the number of purchases of a given period and divide it by the number of customers who purchased from you in that same time span.
- Step 3: Identify the Customer Value
Formula: Use the average purchase value to multiply it by the average purchase frequency rate.
- Step 4: Calculate the Average Customer Lifespan
Formula: simply average the years that your customers have been purchasing from you.
Once you have the figures above, you can now calculate customer lifetime value with this formula: Customer Value multiplied by the Average Customer Lifespan
There are two customer lifetime value methods that are utilised today for customer lifetime value calculations and they are the predictive customer lifetime value model as well as the historical customer lifetime model. Whichever method you choose will depend on the data that your business has.
If you find yourself needing a more in-depth breakdown of calculating customer lifetime value with the perfect example to demonstrate it, we highly recommend you to read this article from HubSpot.
Ways to Maximise and Improve Customer Lifetime Value
Now that you know what customer lifetime value is, its importance and how to calculate it, we’re sharing a list of suggestions on how you can improve and maximise your customer lifetime value:
- Go Above and Beyond With Your Onboarding Process and Customer Service
Receiving great customer service prior to purchasing and after the sale has happened, surely makes any customer feel valued. Even if they only purchase from you once in a while but still choose to buy from you over other brands to fulfil their needs, means you still need to take good care of them. Why? Well, they are still considered your long time customers.
Although it is quite easy to shift focus to only providing assistance before the purchase happens. What’s worse is that if there are no efforts to communicate and build a relationship with your customer after the purchase. With this, an optimised onboarding process that the company can commit to, will help build a relationship that will bring about a higher customer lifetime value.
Remember, the relationship that you establish should make the customer experience all the more enjoyable and not too salesey that they no longer want to engage with your brand any further. This relationship is one of the main reasons it can encourage customers to buy from you again.
Whatever product or service you are offering, go above and beyond the bare minimum with your onboarding process. To do this, start by finding out what your loyal customers need after the purchase. Find different ways on how you can help them with the product or service they have purchased from you. If you’re selling software as a service, try offering a free trial to go with their purchase. This now leads to the second suggestion below.
- Increase Number of Orders
If you’ve been running your business for a while now and one of the problems you might be facing is that your existing customers are not buying from you in the frequency that you expected.
Not to worry, there are many exciting ideas on how your company can push your customers to purchase more frequently which are listed below:
- Follow-ups after some time of inactivity
- Reminders about the items they might want to checkout
- Send unused, fun-sized product samples on their next purchase
- Offer free delivery or installation of their product or service
- A free all-access 7-day trial if you’re selling a subscription service
- A complimentary gift when they purchase above your standard price point
- A special offer for when they are buying more than 3 products
- Present complementary items that go well with what they’re about to purchase (upsell and cross-sell method)
If you’re wondering what it means to upsell and cross-sell to your customers, keep reading as we’ll be explaining how it can help maximise your CLV.
- Provide Products or Services That Have More Value or Go Well With Your Buyers’ Purchases
As recently mentioned, you can offer a complementary item to what your buyers are about to purchase to help build a long-lasting relationship with them. This is called cross-selling.
But you can also offer products or services that have more value than what your buyers’ are considering to purchase and this is known as upselling.
If all of this is still quite confusing and you would like to know more about it, click here to access the blog from Big Commerce.
By choosing either of these tactics, you’ll feel a little more at ease knowing your product or service will most likely increase customer lifetime value.
- Personalise the Experience of Your Customers
When customers feel like they’re being personally appreciated, it makes them more likely to buy from you again. There are many creative ways to make the experience feel very personalised and a few of them include sending personalised appreciation e-mails or message greetings that include their name.
Make sure to keep track of their purchases so that every time an order comes in or a sale is made, you are able to tailor the best action to make it all the more personalised.
- Create a Rewards or Loyalty Program That Customers Actually Find Value In
It’s usually not enough to offer customer-loved discounts.
A loyalty or rewards program makes customers feel acknowledged and appreciated for being repeat customers and staying with the brand throughout the months that unfold. That’s why it’s important for customer retention efforts to go beyond just engaging customers.
If you give your customers an exciting opportunity to earn valuable customer loyalty rewards by continuing to do business with you, they will choose to continue buying from you.
Your program could include sharing vouchers with your loyal customers, as it is a great way to increase your retention rate. It keeps them hooked to what else you are offering. They’ll probably be on the lookout for incentives that they like.
Sending out exclusive offers is also an excellent way of showing your customer that you see them, that you know they are loyal to your brand. And as a way to show your appreciation, you want to offer them something that isn’t available to anyone but them.
So however you choose to create your loyalty or rewards program, a chunk of it must be geared towards customer appreciation. By doing this, both you and the customer enjoy a great customer-business relationship.
- Continue to Stay Helpful
One of the ways to stay helpful throughout the entire relationship is by listening to your buyers’ pain points or concerns and most importantly, responding in a timely manner with helpful solutions. These can make all the difference with how your existing customers perceive your brand as a company that cares for its customers.
We’ve listed a few ideas that your business might like to try in order to stay helpful to your buyers:
- Send newsletters that offer invites to events that will help your customers better utilise the product/service they have purchased
- Provide educational or useful content that only your buyers have access to once they purchase from you. This can be an e-book or access to webinars
- Set up an account on the platforms that your buyers are mostly using to communicate with you and be ready and actively present to assist them
- Providing a list of helpful blog posts to better understand the usage of a product that your company has created
- Understand What Your Repeat Customers Want and Act On It
It is without a doubt that customers’ demands are increasing. So it would only be logical to provide them with what they want if you want them to continue purchasing from your business.
The more your business knows about what your customers want and need, the better equipped your company will be in providing those needs and meeting their desired expectation of customer satisfaction. This includes being proactive in receiving feedback or suggestions from surveys in order to improve. Additionally, by listening to your customers, you are able to add more relevant data to your existing customer database to further be able to analyse their needs.
In today’s extremely competitive business world, customer lifetime value is one of the most important factors to consider for your company’s growth and continuity. The more you nurture and serve your buyers, the more they’ll choose to stay with you, as a result, brand loyalty and profitability increase.
So there you have it. Everything you ever wanted to know about CLV. We’ve covered what it is, why it matters, how to calculate it and ways to increase it.
Are you ready to start increasing your profits? If so, the first step is calculating your own customer lifetime value. Once you have that number in hand, you can begin brainstorming ways to make sure that buyers stick around for as long as possible.
And if you need help with any of that, our team is more than happy to lend a hand. Thanks for reading!