Customers are the lifeblood of a business.
Even if you have the best products and the greatest team, it doesn’t mean anything if you don’t have people purchasing from your brand.
Therefore, understanding your customers and what they are looking for at every step of the buyer’s journey is crucial to the long-term success of your brand.
In order to learn more about your customers and the value they provide for your brand, it’s helpful to know how much value they will bring to your organization over the entirety of their relationship with your business.
After all, it’s more important to nurture your current loyal customers than spend time and money finding new ones.
In this article, we’ll help you learn about the long-term value of customers and how to calculate customer lifetime value for your business.
We’ll also explore why customer lifetime matters, and how you can increase the value each customer has in your organization.
What is Customer Lifetime Value (CLV)?
Customer lifetime value, often abbreviated as CLV, is a metric that is used to track the total revenue a business can expect to get out of an individual customer for the duration of the entire business relationship.
Put simply, it’s a calculation of how much money a customer will spend on your brand for the entire time they are a customer.
The longer customers stay with your brand, the more opportunity they have to purchase and the greater their value becomes.
That means that customer retention is an important part of your CLV as it can increase the overall value your customers have.
The customer lifetime value helps you learn more about your customer journey and the amount of customer loyalty your audiences have.
It can also help you determine which segments of your customers are the most valuable and which could use more work.
How to Calculate Customer Lifetime Value
The simple formula for customer lifetime value is:
CLV = Average Purchase Value x Average Purchase Frequency Rate x Average Customer Lifespan
This calculation might seem overwhelming at first, but can be broken down into five different steps that will give you your customer lifetime value.
1. Calculate the Average Purchase Value
This metric is the average amount of money a customer spends on each transaction with your business.
Average Purchase Value = Total Revenue Earned / Total Number of Transactions
2. Calculate the Average Purchase Frequency Rate
This metric is the measure of how often a customer will purchase from you.
Average Purchase Frequency Rates = Number of Orders Placed / Number of Unique Customers
3. Calculate Customer Value
This step is completed when you can calculate the value of a customer by multiplying the previous values.
Customer Value = Average Purchase Value x Average Purchase Frequency Rate
4. Calculate Average Customer Span
Rather than using a formula, this metric is determined by looking at the average number of years that a customer will purchase from your brand.
This requires you to look into your own metrics and data to figure out how long customers stay with your brand.
5. Calculate Customer Lifetime Value
The final step to get your end calculation is to multiply your customer value and your average customer lifespan together to get your final end result.
CLV = Customer Value x Average Customer Lifespan
What is the Difference Between CLV and LTV?
Customer lifetime value is often confused with another customer metric, the lifetime value.
Lifetime value, or LTV, is a metric that tracks the lifetime spend of customers, but rather than taking it down to the customer value, it is an aggregate metric.
Overall, it’s better to use CLV as your customer value metric because each customer is an individual, and should be considered as such.
CLV gives you a better understanding of what each customer brings to your brand by diving into deeper metrics.
Why is CLV Crucial for Businesses?
In order to get the most out of the customer lifetime value metric, you need to know more than just how to calculate customer lifetime value. You also need to understand why it matters and what CLV can do for your business decisions.
Here are some of the major benefits that customer lifetime value can bring to your brand.
Increases Revenue Over Time
When you increase your customer lifetime value, you can also increase the revenue that your company takes in.
When you track CLV, you can discover which customer segments are bringing in the most value and which are worth your time to market to and attract by improving the customer experience.
Helps You Identify Customer Retention Issues
When you take the time to track your customer lifetime value, you can start to notice trends when your customers are churning and when you are starting to lose your grasp on your customer retention rates.
This allows you to start working on fixing issues and providing more support to your customers.
Targets Ideal Customers
Knowing the value that each individual customer brings to your business can help you determine which segments are most valuable and how much you should be spending on bringing these customers into your business.
This can focus your marketing and sales efforts and help you save money.
Reduces Customer Acquisition Costs
It’s expensive to bring in brand new customers. Customer acquisition costs can be huge, especially in the early stages of advertising and marketing.
However, CLV can help you focus on keeping your existing customers and strengthening the relationship you have with those who are currently buying from you.
How to Increase Customer Lifetime Value
If you calculate your customer lifetime value and are unhappy with the result, don’t worry.
There are many ways you can start increasing your customer lifetime value and ensure that customers get the best experience with your brand.
When your customers are excited about being a part of your brand, they stick around for longer and make more purchases from your company.
1. Perfect the Customer Onboarding Process
Customer onboarding is an important process that can sometimes get overlooked by businesses.
This process takes place in the first few days of a customer making a purchase and explains what you do and why customers should stick around.
Optimizing this process with follow-up emails, welcome emails, and connection options can help you increase CLV.
2. Add More Value to Orders
The more value you can bring to each order a customer places, the more likely they are to stick around and continue purchasing from you.
Think about things like adding a free gift, cross-selling relevant items, improving your packaging and branding, or offering discounts for bundling items.
3. Focus on Long-Lasting Relationships
Long-term relationships are key to success in any business.
However, far too many businesses stop interacting and working with customers after they make their first purchase.
Try to keep up with your customers on social media or through emailing so that they understand they are still important to your business and you value them and their purchases.
4. Listen to Customer Feedback
The best way to get to the source of a customer issue is to listen to customers directly.
When customers start to churn or leave for a competitor, it’s important to know why it is happening.
Listen to the feedback your customers are giving you and offer opportunities for them to give feedback through surveys or polls.
5. Invest in Communication and Connection
In today’s business world, customers want immediate responses.
If the only way for a customer to contact you is to send an email and wait weeks for a response, it’s probably not going to be enough to keep them coming back.
Things like chatbots, 24/7 customer service lines, and live chat can help you communicate better with customers.
6. Improve Your Customer Service
Customer service is one of the major factors that customers take into consideration when choosing whether or not to remain with a company or find a different option.
Offering things like omnichannel support, personalized customer interactions, and easy refund or return policies all help improve your customer service processes.
7. Offer a Great Loyalty Program
A customer loyalty program rewards your customers for spending money with you in the form of gifts, points, or bonuses.
A great customer loyalty program will encourage a customer to stay with your brand in order to get the rewards you offer.
It also increases the entire customer experience and improves the interactions customers have with your brand.
You may also be interested in these articles:
- How and Why Customer Segmentation Can Benefit Your Marketing Strategy
- Why Customer Advocacy is Crucial for Your Business
- Customer Obsession: The Quality your Business should be Improving
Wrap Up
Understanding how to calculate customer lifetime value can bring many different benefits to your business.
It helps you learn more about your customers and find gaps in your processes that can be improved to increase the value each customer has.
Once you know how to calculate customer lifetime value in a simple way, you can continually use the metric going forward.
There’s more to understanding customers than just knowing their lifetime value.
If you want to learn more about how to gain insights into your customers, then check out our buyer’s journey mini course!
This email series will help you learn about audience research, content formats for each buyer’s journey stage, and distribution strategies, among other important things.
