The lifetime value of a customer is a business metric that refers to the overall worth of a customer from when they make their first purchases to their last.
Why is the lifetime value of a customer important?
Keeping track of your customer lifetime value (CLV) is highly beneficial for your business; some of its benefits include:
- More realistic KPIs: It helps you find the right balance between short-term and long-term marketing goals. It will also help you calculate other metrics such as churn; a loyal customer with a high lifetime value is less likely to churn.
- Saves Money: No matter what industry you are in, customer acquisition costs will always be high! Figuring out the lifetime value of your customers and how to improve your CLV will save you money; keeping a customer is much cheaper than finding new ones!
- Saves time & improves efficiency: Knowing a customer’s lifetime value will help you monitor your customer success efforts. If your customer's lifetime value is low, you’ll know that something is going wrong, and you’ll be able to fix it. Similarly, you might think that your marketing efforts are successful, provided that you have high conversions, but if you find that these customers aren’t repurchasing, there might be a better clientele that you could advertise to!
Calculating the lifetime value of a customer
When it comes to calculating the lifetime value of a customer, businesses tend to choose between two key models:
- Predictive: Your Predictive customer lifetime value is an estimation of what your customer lifetime value will be and is typically calculated using machine learning and regression.
- Historical: Your historical customer lifetime value is a much less sophisticated calculation of a customer’s lifetime value; it calculates the overall value of a customer without considering whether or not existing customers will continue purchasing products or services from your business.
Formulas for customer lifetime value
To calculate the lifetime value of your customers, there are many formulas that you will have to know. In addition, each of these metrics can be used independently to identify core pain points regarding your CLV.
Average Purchase Value(APV)
The first key metric you need to know is the average purchase value. This is the typical amount a customer will spend in a single session.
To calculate the average purchase value, divide your company's total revenue for the year and divide it by the number of purchases for the year.
Average Purchase Frequency Rate
The average purchase frequency rate will tell you how often your customers make a new purchase over a certain period of time.
To calculate your average purchase frequency for a given year, you need to divide the total number of sales by your number of customers for that year.
Once you have calculated your average purchase value and average purchase frequency rate, you can calculate your customer value.
To calculate your customer value multiply the average purchase value by the average purchase frequency rate.
To give you an example of a customer value, if your average purchase value was 100 pounds and your customers typically made three sales with you, that customer’s value would be 300 pounds.
Average customer lifetime value
To calculate the average lifetime value of a customer, you will need to know the average lifespan of your customers.
To calculate the average customer lifetime value, you need to divide the sum of all your customer lifespans and divide that figure by the number of customers you had over that period.
The Customer Lifetime Value Formula
To calculate the average lifetime value of a customer, you need to multiply your average customer value by your average customer lifespan.
For example, if your customer's value is 300 pounds for a year and they usually continue making purchases for three years, your customer's lifetime value is 900 pounds.
Improving the lifetime value of a customer
If you feel your customer's lifetime value is low, there are several ways you can boost your CLV.
1.) Improve Your Customer Service
The first place you’ll want to look at is your customer service. 82% of customers stop doing business with a company because of poor customer service!
To improve your customer service, you could:
- Provide 24/7 Support: Offering around-the-clock customer service can set you apart from your competitors who have that often inconvenient 9 to 5 standard! Providing 24/7 customer service is especially beneficial if you have a global customer base or are in the B2B industry where business owners might not have the time to reach out during regular business hours.
- Keep on top of your Social Media: Considering that one-in-three consumers discover new brands, products and services through social media, it makes perfect sense that you want to have high-quality customer service on all your business's social media channels.
- Improve your training efforts: Although high-quality training for your customer service employees can be expensive it’s definitely worth the additional cost. You’ll dramatically reduce your churn rate with an expert customer service team!
2.) Build Relationships
In 2020, the global customer relationship management(CRM) market was already 52 Billion dollars and is estimated to double by 2028! This market's expansion can be directly correlated to the value it brings businesses; If there isn’t a strong bond between your business and your customers, there will be less friction when moving away from your business and onto your competitors. To further reduce your churn rate and boost the average lifetime value of a customer, you could:
- Invest more into CRM technology.
- Provide CRM training.
- Improve omnichannel support.
3.) Optimize Your Marketing Channels
Of course, your marketing channels are a key component in getting new customers, but you shouldn’t forget that your marketing channels can also be used to retain your current customers! There are several ways you can use your digital marketing channels to improve your customer lifetime value.
- Start segmenting your audience: Whether you are focused on social media, email marketing or even influencer marketing, your audience will be very broad! Separating this larger audience into smaller, more manageable groups gives you better insight into what and why your customers are leaving. You’ll also be able to target these customers with customised messages.
- Conduct surveys: Surveys are a fantastic way to understand better who your customers are and what they want. For example, after purchase, you could ask your new customers about their product preferences and what they would be interested in the future. This valuable data will allow you to understand your audience better and improve the likelihood of them repurchasing in the future.
- Re-engage and Retarget: One of the most effective ways to improve the lifetime value of a customer is by constantly re-engaging with them. You could send your customers updates when products they might be interested in are released, send them special offers as a reward for their loyalty, or use paid marketing methods like re-targeting.
4.) Keep your Customer Lifespan in Mind
One of the biggest factors at play when calculating a customer's lifetime value is the average lifespan of your customers. If your customers have a lifespan of less than one year, then you should consider offering longer billing cycles if possible. For example, if you are in the SaaS industry, you could offer a discount for an annual subscription.
If you are an eCommerce business that doesn’t cater for a subscription module, changing billing cycles won’t be applicable for you however, there are still ways that you can use the lifespan of your customers to your advantage! For example, if you find that your customers tend to churn at month ten, you could create a special offer for your customers that are in their tenth month of business with you.
5.) Boost expansion revenue
Another way you can improve your customer's lifetime value is by improving your average purchase value; you can do this by improving your expansion revenue. There are three main ways that you can boost your expansion revenue.
- Upselling: This is a very popular sales technique in which you offer the customer the opportunity to upgrade to a more premium product or service at an additional cost.
- Cross-selling: Cross-selling is another fantastic means to improve a customer's lifetime value in which you offer suggestions to your customers of similar products or products they might also be interested in.
- Add-ons: Add-ons are a sales technique very similar to upselling. However, rather than offering a customer a product upgrade before purchasing with an add-on, the customer has already purchased the base product. Essentially, an add-on would complement the product or service that the customer already has.