Everything You Need to Know to Know About Customer Lifetime Value
in Marketing by John Allen
To run a profitable business, it’s essential to know how well your business attracts and retains customers. Even more important than this is to understand how valuable each customer is to your business.
The metric required to determine this is customer lifetime value (CLV). Measuring, monitoring, and optimizing this metric enables unique insights into how profitable your customers are. When you know this, you can take steps to boost profitability, build customer trust, and drive more business success.
By creating methods of optimizing existing customer relationships, your business spends less money on attracting and nurturing new ones. In doing so, this lowers your customer lifetime value metric, which is the name of the game.
In this article, we’ll answer the following questions plus everything else you need to know about customer lifetime value (CLV):
- What is customer lifetime value (CLV)?
- Is LTV the same as CLV?
- How do you calculate customer lifetime value?
- What is a good customer lifetime value?
- How to improve your customer lifetime value.
- How to use customer lifetime value.
What Is Customer Lifetime Value (CLV)?
Customer lifetime value is known by many acronyms. CLV, LTV, and CLTV are the most common. Regardless of how you refer to it, customer lifetime value (CLV) is the value, in monetary terms, of a single customer relationship with a business.
CLV is a long-game metric. Rather than purely looking at one purchase, CLV estimates the value of the customer based on factors like shopping behavior, AI-insight tools, and the effectiveness of social proof marketing.
Is LTV the Same As CLV?
Although LTV is used when discussing customer lifetime value, there is a difference. LTV (lifetime value) is the value of the total number of customers, not taking into account acquisition costs. In comparison, the CLV metric refers to the value of individual customers with your brand.
CLV is a more important metric to measure because it gives you more leverage over marketing campaigns. CLV works to assess individual customer behavior patterns to create audience segments. When audience segments are determined, they can be analyzed to find ways to boost their value.
This data can then be used to predict future purchases and brand interactions. For example, segmentation based on behavioral data can be explored to see if this audience portion thinks your website has a bad logo design. How customers perceive a brand forms an integral part of relationships and customer lifetime value.
How Do You Calculate Customer Lifetime Value?
To work out your CLV in simplest terms, take the cost of acquiring a customer from the revenue the customer generates. This is a very basic formula that depends on the business industry and customer interaction dynamics.
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To look more in-depth at your business’s CLV, it’s helpful to look at certain touchpoints to evaluate positive digital customer experiences:
- Which stage do customers start to create value?
- Customer interaction across all channels.
- Potential for revenue interactions.
- Re-engagement likelihood and opportunities.
A more comprehensive calculation of your CLV looks a bit like this:
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This formula takes into account the average customer order value, customer retention rate, and frequency of purchases. Calculating these elements enables a more thorough understanding of your business’s CLV.
- Average order value - look at a one or three-month period for this data.
- Frequency of orders - how often are customers placing orders? This metric varies wildly on your business model and typical product frequency purchase.
- Measure customer retention - how long each customer remains loyal to your brand.
How To Increase Average Order Value
To generate higher value orders, use personalized product recommendations to incentivize customers. Up-selling and cross-selling techniques are successful at increasing the average order value of sales. Personalized shopping experiences are integral to how consumers buy now, so this method is definitely worth tapping into.
How To Increase Frequency of Orders
Post-purchase suggestions work to increase the frequency of orders and act as timely reminders about your brand. Set “low stock” automation using AI sales technology for maximum efficiency, interspersed with personalized campaigns based on the customer lifecycle stage. When utilized at the right place and time, AI software generates revenue streams effortlessly.
How To Increase Customer Retention
Increasing the lifespan of customers relies on strong brand affiliation. Consider reward schemes for customers in the “most engaged” segment to reinforce their loyalty to your business. Less engaged customers may benefit from remarketing efforts and email campaigns.
CLV Example
A hair salon has various types of customers. But the most common is a cut and blowdry, costing $70. A typical customer for this service would frequent a salon around once every three months.
The CLV calculation would be:
CLV = $70 (average sale) x 4 (annual purchases) x 3 years = $840
Each metric needs to be considered carefully as this is a balancing act. For instance, if you try to increase the average order value by too much, your loyal customers may go to your competition for better value. But taking steps to increase customer retention by implementing call queuing software to enhance the customer experience would be a positive move.
What Is a Good Lifetime Customer Value?
Firstly, establish what a good CLV for your business’s industry is. Your CLV depends on the products you sell and the frequency thereof. When calculating and analyzing CLV, take into account each element of the equation and compare them against the purchase frequency of other products and services. Ideally, you want to look at CLV in relation to your different product offerings.
How To Improve Your Customer Lifetime Value
The bottom line with customer lifetime value is establishing and nurturing customer relationships. It goes without saying that customers in your pipeline that have a high CLV should be carefully maintained to ensure they remain loyal customers, thus increasing their CLV further.
To achieve this, take time to view their experience with your brand and digital interactions through your customer’s eyes. Check if there are any roadblocks to purchase in their way, optimize their website journey and provide genuine value to reinforce trust.
For example, exploring the effects of shopping cart abandonment rates on your ecommerce website will enable an understanding of potential navigation problems. Once you know issues, you can address them and improve the experience to encourage more sales.
Check out these strategies for improving your CLV:
Minimum Order Incentives
We’ve all been there. Just spend $5 more, and you get free shipping (worth $5). Free shipping is a psychological trick that works wonders for consumers. A transparent shipping process is one that should be encouraged, as customers who have knowledge of this are empowered to make decisions about their purchases.
Focus your minimum order incentives on your segments that are highly engaged and proven repeat purchasers. Different strategies apply to the customer segments that need incentivizing to add items to their carts in the first place.
Repeat Engagement Campaigns
Encouraging customers to repeat buy isn’t too tricky to achieve when you know and understand the behavior patterns of your customers. Fostering loyalty with your business is the first step.
Imagine this scene:
- Engaging video on social media highlighting a brand new foundation.
- Customer testimonials reinforcing that vital social proof.
- Money-back guarantee for risk-free purchase offering security.
- Personalized product recommendations are offered to accompany the order.
- The customer receives instant confirmation confirming when the order will arrive.
- A personalized, engaging email arrives informing order is en route.
- Foundation arrives at the customer with a free surprise gift.
- The customer is invited to rate and review the product on social media.
- Follow-up email after the purchase is received to check that the customer is satisfied.
- Timely emails are sent reminding the customer that it’s probably time to re-stock.
- Newsletters are sent informing the customer of brand new products and VIP incentives.
This fictitious beauty brand has delivered a pretty perfect customer experience, optimizing all the touchpoints pre-purchase and post-purchase to ensure a great transaction. This scenario is ideal in terms of taking every opportunity to increase customer lifetime value, thereby generating reams of loyal brand advocates.
How To Use Customer Lifetime Value
Once established, your CLV metric can be used widely across marketing efforts. Some campaigns that materialize from CLV are:
- Customer retention schemes
- Tailored ecommerce SEO
- Loyalty programs for VIP customers
- Personalized marketing experiences
- Discounts for high LTV consumers
- Specialized marketing segmentation
- Upselling tactics for lower CLV customers
- Social media audience generation
Your CLV analysis delivers the data on how much customers cost to acquire as well as the optimal channels for acquisition and attrition. Future marketing efforts can be tailored to attract the highest value customers based on previous customer behavior patterns.
Analyze every customer touchpoint to seek opportunities for optimization. For example, businesses that use contact centers may want to explore CCaaS providers as part of the CLV analysis to ensure the customer service experience is enhanced at every stage.
Start Measuring CLV Today
As illustrated, your business’s CLV focuses on retaining valuable customers and ensuring no overspend occurs on attracting and engaging new ones.
Don’t forget important elements to CLV that add to the customer experience and, therefore, value. Using tools such as OMS software for ecommerce businesses and the best electronic signature software for your company ensures that order processes are streamlined and secure."
Customer lifetime value is one of the most important metrics to measure. When analyzed in-depth, this KPI can increase not only customer satisfaction and experience but also deliver bigger ROI for your business.
