Customer Lifetime Value: What Is It and How to Calculate It

2019/03/04 08:00

customer lifetime value

If you’re looking to boost your profits, you should definitely know how to calculate the lifetime value of your customers.

A big part of running a successful business is knowing how to acquire new customers in the most cost-effective way possible while also nurturing your existing clients.

Knowing how to calculate the lifetime value of your customers is essential to improving your marketing, product development, and customer support efforts.

This is what you need to know.

Customer Lifetime Value (CLV) Explained

In a nutshell, CLV estimates how much revenue you will receive from a customer throughout their relationship with your business.

By knowing how much repeat business you can expect to get, you’ll have a better idea of how much time and money you should invest in customer retention versus acquisition.

Why Customer Lifetime Value Matters

While you may want to focus on the amount of money that your customers are spending with your business today, what they plan to spend in the future matters just as much.

High CLV = Higher Profits

Businesses will always need to spend money to make money but acquiring new customers is far more expensive than retaining your existing ones.

Here are a few of the decisions you can make once you know your CLV:

  • Refine Your Marketing Strategy. Once you know where you should be spending more of your budget, you can easily adjust your marketing strategy, which should lead to a higher return on investment.
  • Increase Customer Satisfaction. Providing customers with a great experience is one of the most effective and affordable ways to retain them and generate ongoing sales.
  • Develop New Products. CLV will help you incorporate customer feedback into your product development efforts. Many businesses even find themselves narrowing down their product lines once they start focusing on CLV.

A Basic Formula for Calculating Customer Lifetime Value

Step 1: Calculate the average value of a sale by dividing total revenue for a specific time period by the total number of purchases for that same period.

Step 2: Calculate sales frequency by dividing the total number of purchases over the same time period by the total number of unique customers who purchased something during that time.

Step 3: Calculate customer value by multiplying your average sales value by your sales frequency.

Step 4: Determine your average customer lifespan by looking at the average number of years a customer continues to purchase from your business.

Step 5: Calculate your customer lifetime value by multiplying your customer value by the average customer lifespan, which will tell you how much revenue you can expect from the average customer.

Tactics for Increasing Your Customer Lifetime Value

Once you’ve calculated your CLV, you will need to work on improving it. Here are a few tactics for you to consider:

  1. Enhance Your Existing Product Line. Introduce products or services that will complement your existing offering, which will give existing customers more reasons to keep purchasing from your business. However, if you already sell one good product that people buy on a continuous basis, you may just want to find other ways to market it such as encouraging people to buy it as a gift.
  2. Make Your Marketing More Relevant. By segmenting your email and SMS lists, you can make your marketing campaigns even more relevant. Knowing more about your audiences’ interests and past purchases will help you create campaigns that appeal to different segments.
  3. Create a Coupon Calendar. Everyone loves a discount so create a campaign calendar that is completely focused on coupons and special offers. When your customers know that you offer great deals on a regular basis, they’ll start keeping an eye out for your emails and SMSs.
  4. Retarget Customers on Social Media. Funneling traffic from social media will allow you to retarget customers and encourage them to come back to your site.
  5. Use Thank You Emails. Thank you emails are a great way to keep in touch with customers and show your appreciation. The best time to send out a thank you email is directly after someone makes a purchase. You can even include a small discount that they can use on their next purchase.
  6. Contact Dormant Customers. If a customer hasn’t purchased from you in the last six months, check in with them using a quick email.  Find out whether they are interested in returning to your site or if they would prefer to opt out of your emails. It’s important to remember that getting rid of dormant emails is actually a good thing.
  7. Optimise Your Buying Experience. Very often customers don’t want to make a second purchase because of their initial buying experience. Use an analytics platform such as KOBIT to see where potential customers might be dropping off during the sales process so that you can optimise it accordingly. The easier it is to make a purchase, the more likely it is that a customer will return.
  8. Create a Loyalty Program. Loyalty programs are another great way to keep customers coming back for more.

If you’re not currently aware of what your CLV is, there’s never been a better time to calculate it.