Customer Lifetime Value (CLV)

What is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV, or CLTV) is the metric that describes the total revenue a business can expect from a single customer account throughout the business relationship.

The metric takes into consideration a customer's revenue value and compares it to the company's predicted customer lifespan.

Customer lifetime value can also help identify customer segments that are most valuable to your business. The longer a customer maintains brand loyalty (continues purchasing from your business), the greater their lifetime value becomes.

Customer support and success teams can directly influence this metric during the customer's journey. They also play critical roles in solving problems and offering solutions to decrease churn and increase customer loyalty.

Why is Customer Lifetime Value Important?

Here are some reasons why your CLV is essential:

1. It directly influences your revenue

CLV directly identifies segments of customers that bring in the most revenue for your business. Once these customers are identified, then your customer success and management teams can focus on providing solutions to keep them happy and in turn ensure retention.

2. It boosts customer loyalty and retention

Optimize your CLV and consistently add value to your customers in the form of customer service to ensure retention and loyalty. This leads to a reduction in churn and increase in referrals, positive reviews and more.

3. It helps you target your ideal customers

Once you understand what your customer lifetime value is, be it $500 or $5,000, you can develop better customer acquisition strategies that will target customers who will spend the most on the products and services you offer.

4. It reduces customer acquisition costs

Acquiring new customers can be really expensive. Therefore to reduce your customer acquisition cost it is imperative to nurture existing customers.

How to Calculate Customer LTV

Before calculating customer lifetime value, you need to calculate the average purchase value. Next you need to multiply that number by the average number of purchases to determine customer value. Once you have calculated the average customer lifespan, you can then multiply that by customer value to determine customer lifetime value.

The formula to calculate customer lifetime value is as follows:

                        Customer Lifetime Value = *(Customer Value * Average Customer Lifespan)                        *Where, Customer Value = Average Purchase Value * Average Number of Purchases*

Let’s break down this formula further and find out how to calculate the individual components of the equation shown above.

1. Average Purchase Value

Average purchase value (APV) can be calculated by dividing the total revenue of your company in a specific time period (usually one year) by the total number of purchases in the same time period.

                            Average Purchase Value = Total Revenue/ Number of Orders

2. Average Purchase Frequency Rate

Average purchase frequency rate (APFR) is calculated by dividing the number of purchases in a specific period by the number of unique customers who made purchases during that same period.

    *Average Purchase Frequency Rate = Number of Purchases/Number of Customers*

3. Customer Value

Customer Value (CV) is calculated by multiplying the average purchase value by the average purchase frequency rate.

        *Customer Value = average purchase value X average purchase frequency rate*

4. Average Customer Lifespan

Average Customer Lifespan (ACL) is calculated by averaging the number of years a customer continues purchasing from your company.

            *Average Customer Lifespan = Sum of customer lifespan/Number of customers*

5. Customer Lifetime Value (CLTV)

To calculate customer lifetime value (CLTV) you need to multiply customer value by the average customer lifespan. This value will give you the revenue you can expect from a single customer at your business.

                   *Customer Lifetime Value = (Customer Value * Average Customer Lifespan)*

How to Improve Customer Lifetime Value?

Here are some strategies that can help with improving your customer lifetime value:

1. Optimize your onboarding process

Customer onboarding is the first interaction a customer has with your brand. Therefore, it is imperative that your onboarding process is seamless, quick and smooth. This in turn will increase their lifetime value at your company.

2. Avoid bold claims

Most brands end up making bold claims to impress customers and end up failing when its time to deliver. So always follow the mantra of under promise and over-deliver.

3. Increase average order value

The best way to do this is by implementing cross-selling and upselling techniques with existing customers. Always make sure that your customers are benefiting from this as opposed to making them buy an expensive product or service they do not require.

4. Engage and foster relationships with your customers

Do not hold back on interacting with your customers after they have completed a purchase. The best way to develop a rapport with them. Some methods to use when engaging with your customers are:

  • Social Listening: Keep an eye out on what your customers are saying about your products or services on social media.

  • Period Check-ins: Regular check-ins with your customers will allow you to identify what issues your customers are facing. This in turn will help you improve your product or service and provide better value to your customers.

  • Requesting and implementing customer feedback: The best way to know what features your customers love and hate about your product or service is by requesting feedback from your customers. This will provide you with insights on how to fix and improve them.

  • Boost customer loyalty: Use rewards and gifts tastefully as a way to boost customer loyalty and improve retention.

  • Focus on customer service: While it is great to implement all the above mentioned points, the best way to improve your customer lifetime value is by providing world class customer service.

Wrapping Up

Customer lifetime value is an incredibly useful and valuable metric to calculate and track. It not only tells you which of your existing customers spend the most at your business but also points out which ones will remain loyal to you for the longest amount of time. Incorporate this metric into your customer engagement to improve retention and reduce churn rates.