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A Guide to Customer Lifetime Value

October 8, 2020
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written by James Rooney
Business Dev

Customer lifetime value is key to measuring customer experience. Read our guide to the ins and outs of the customer lifetime value model.

Many businesses place the majority of their focus on targeting and acquiring new customers to drive their revenue and increase brand awareness. While this isn’t a bad strategy and is needed for growth, it is also essential to remember the value of existing customers.

This is known as the customer lifetime value, and if you want to thrive you need to understand how to retain customer longevity and loyalty.

What is customer lifetime value?

Simply put, customer lifetime value, or CLV for short, is the measurement of how valuable a customer is to a business over the whole period of their cooperation, or relationship. Here are 4 factors to consider:

  1. CLV takes into account the customers total worth to a company during their lifetime and is calculated for the entire relationship and not on a purchase-by-purchase basis alone.
  2. It is a crucial metric to track when it comes to a customer experience program as it costs businesses more money to acquire new customers than it does to keep existing ones.
  3. Increasing the value of your existing customers is, therefore, a great way to create and drive more growth, and companies that know their CLV can then develop strategies to retain existing customers, whilst attracting new ones.
  4. CLV is intrinsically linked to business revenue and differs from other customer metrics such as the CSAT that measures customer satisfaction and the Net Promoter Score (NPS), which is used to measure customer loyalty.

When looking at the overall picture, the CLV metric is an indicator of the profit expected from a specific customer relationship, which then allows business owners to come up with an estimate of how much they are willing to invest in maintaining it to get good profit margins.

For example, suppose a customer’s CLV number equals £1,000. A business won’t want to spend more than that to keep the relationship going as it wouldn’t be a very profitable or beneficial decision.

How to calculate the Customer Lifetime Value

The formula to calculate CLV can be a bit tricky at first, especially if you are new to it.

First, you need to calculate the average purchase value and multiple it by the average purchase frequency rate. This will ultimately determine the customer’s value, which will then allow you to multiply by the customer’s average lifespan to give you your customer lifetime value.

Sounds complicated? Here’s a little step-by-step how-to guide to make the process a bit easier.

1. How to calculate the average purchase value

Divide your company’s total revenue for a specific period (most commonly a year) by the number of purchases made during the course of the same period.

2. How to calculate the average purchase frequency rate

Divide the total number of purchases by the number of customers who made purchases throughout that time.

3. How to calculate customer value

Multiply the average purchase frequency rate by the average purchase value.

4. Work out the average customer lifespan

Determine this figure by averaging the number of years a customer continues to make purchases from your business.

4. Finally, calculate the CLV

Multiply the average customer lifespan by the customer value to give you the estimated revenue generated for your business from an average customer, during the course of their relationship with you.

How to improve customer lifetime value

Of course, once you figure out the CLV, the next question is how to improve upon this figure to result in higher revenue and profit margins for your company.

Here are a few tips for nurturing the relationship with your customers, in turn boosting your CLV figures.

Reward your customers

Recognising and rewarding your best customers with special offers is a great way to nurture relationships with those who are loyal to your business. Create a loyalty program and marketing strategy that targets these customers specifically and offer extra services or goods when they make purchases with you such as access to select services, pre-released and exclusive products, free shipping or offers on exclusive benefits.

A loyalty program makes the customer experience more personal, creating an incentive for them to repeat their purchases and remain loyal to your company.

Improve and maintain good communication

Open and transparent communication between a business and customer strengthens the relationship. It creates a level of trust, making the company seem more ‘human.’ Customers appreciate companies who allow their voices and opinions to be heard.

Therefore, in today’s competitive climate, it is vital to proactively respond to all customers, address negative comments, low ratings and any other problems that they might be having. Once a customer knows that a brand is responsive and receptive to their issues, they are more likely to return as they are confident in the knowledge that they will be well taken care of.

Retargeting

It is essential not to forget about your customers once they have made that all-important first purchase. To improve CLV, it is vital to re-engage those who have already had an experience with your business and made a purchase, to remind them of the company and increase brand awareness.

Customers who have forgotten about the excellent experience they had with you may need that little nudge. That’s why products with a shelf-life can be extremely beneficial in your retargeting efforts due to time-sensitivity, which could lead to another quick purchase.

Focus on customer experience

Lastly, customer satisfaction should always be a priority, whether it is their first initial purchase, or they are a returning client. While customer experience is made up of a variety of factors, one thing that remains constant is that the connection between the brand and the customer has to exist in every instance.

This includes points of contact through each stage of the journey, whether that be purchases, customer service contact centres, store visits and even the customer’s exposure to advertising campaigns and social media.

Become customer-centric and improve their experience with a management programme that explicitly monitors your progress. These programmes involve a process of making vital changes that ultimately lead to long-lasting improvements in how customers feel towards your company, and in turn, improving CLV metrics exponentially.

Further resources

Conclusion

With the odds of acquiring and selling to a new customer between a relatively low 5-20% compared to a much higher 60-70% selling to an existing one, it’s apparent just how important customer lifetime value is to the continued success of a company. That is why it should be an area of focus for all companies in these difficult and trying times.

Not only will CLV attract and retain long-term customers who will become natural brand ambassadors and repeat purchasers, but it will also help to build a stable and successful business along the way.

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Author
James Rooney

I'm a Business Development Manager with a history of working to a high standard in multiple industries. The focus in my current position is building relationships between our company and the clients we serve. When I’m not working, you will probably find me with either my nose buried in a book…. Or up a mountain.

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