Differences in products, costs, purchase frequencies and purchase volumes can make customer lifetime value calculations complex. However, with the right tools, you can find customer lifetime value in just a few clicks. With an understanding of CLV, you can make better-informed marketing and sales decisions, among other benefits. This guide provides insights about customer lifetime value, how to calculate this metric and more useful information about CLV that business owners and managers should know.
Customer lifetime value CLV is a measure of the total income a business can expect to bring in from a typical customer for as long as that person or account remains a client. Each provides important insights into how customers interact with your business and if your overall marketing plan is working as expected.
Note: There are multiple definitions of CLV: Basic calculations that only look at revenue and more complex equations that factor in gross margin and operational expenses like COGS, shipping, and fulfillment.
Marketing expenses can be included but are sometimes left out if they are too variable. Customer lifetime value boils down to a single number, but there may be significant nuances.
By understanding the different parts of your CLV, you can test different strategies to find out what works best with your customers. Thanks to its simplicity, CLV can be an important financial metric for small businesses. But why does that number matter? In the example above, we figured out the average lifetime value of a customer for a grocery store.
But why do businesses care about CLV? Here are a few key reasons to track and use CLV:. The system does all of the calculations for you. Each of these inputs acts as a lever you can pull to grow your CLV. However, every move your business makes may have unintended consequences that impact CLV. For example, a price increase may improve your average transaction size, but it could push customers to shop less often or look for lower-cost alternatives.
Experienced marketers familiar with the four Ps of marketing — product, place, price and promotion — have a strong understanding of how marketing efforts directly influence customer lifetime value. The best way to understand CLV is through examples. Here are examples from three very different industries to better demonstrate how customer lifetime value may impact your company:. The typical customer is a local worker who visits two times per week, 50 weeks per year, over an average of five years.
A car dealership has a much higher average sale amount with a lower purchase volume. Customers are loyal to this brand and tend to keep buying from it for 15 years.
Customers typically subscribe for three and a half years and use automatic monthly payments. There are many different strategies companies can adopt to boost their CLV. Customer loyalty programs keep customers engaged and reward frequent purchases. Airline frequent flyer programs and restaurant punch cards are popular examples. Incentivizing customers to return can increase purchase frequency and the amount of time a customer buys from a brand. Your website, storefront, call center and other touchpoints are all part of the customer experience.
If customers enjoy a smooth, low-stress shopping experience every time, they are more likely to return for repeat business. Some customers buy a product or service from a business and don't know what to do next. Successful businesses chart a path for their customer relationships over time. Turning a one-time customer into a source of recurring revenue is essential for growth in many industries. Businesses that actively monitor all interactions between the company and their customers can identify ways to improve the customer experience and customer loyalty.
This should span channels like advertising, customer support and sales. Bad customer service is a quick way to see your CLV quickly fall, as customers leave for competitors. If you want your business to acquire and retain highly valuable customers , then it's essential that your team learns what customer lifetime value is and how to calculate it.
Customer lifetime value CLV, or CLTV is the metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.
The metric considers a customer's revenue value and compares that number to the company's predicted customer lifespan. Businesses use customer lifetime value to identify customer segments that are most valuable to the company.
The longer a customer continues to purchase from a company, the greater their lifetime value becomes. This metric is something that customer support and success teams can directly influence during the customer's journey. Customer support reps and customer success managers play critical roles in solving problems and offering recommendations that increase customer loyalty and reduce churn.
The CLV identifies the specific customers that contribute the most revenue to your business. When a company optimizes its CLV and consistently provides value — in the form of excellent customer support, products, or a loyalty program — it tends to increase customer loyalty and retention. And with more loyal customers comes a lower churn rate, as well as an increase in referrals, positive reviews, and sales.
Armed with that knowledge, you can develop a customer acquisition strategy that targets customers who will spend the most at your business. Acquiring a new customer can be a costly affair. In fact, an article published by Harvard Business Review found that gaining a customer can cost anywhere between five and 25 times more than retaining an existing one.
By doing so, you'll have higher profit margins, increased customer lifetime values, and reduced customer acquisition costs. To calculate customer lifetime value, you need to calculate the average purchase value and then multiply that number by the average number of purchases to determine customer value.
Then, once you calculate the average customer lifespan, you can multiply that by customer value to determine customer lifetime value. Below, we simplify things by providing you with two models that companies will use to measure customer lifetime value.
The historical model uses past data to predict the value of a customer without considering whether the existing customer will continue with the company or not.
With the historical model, the average order value is used to determine the value of your customers. However, because most customer journeys are not identical, this model has certain drawbacks. Active customers deemed valuable by the historical model might become inactive and skew your data. Unlike the historical customer lifetime value model focusing on past data, the predictive CLV model forecasts the buying behavior of existing and new customers.
Using the predictive model for customer lifetime value helps you better identify your most valuable customers, the product or service that brings in the most sales, and how you can improve customer retention. Calculate this number by dividing your company's total revenue in a period usually one year by the number of purchases throughout that same period. Calculate this number by dividing the number of purchases by the number of unique customers who made purchases during that period.
Calculate this number by multiplying the average purchase value by the average purchase frequency rate. Calculate this number by averaging the number of years a customer continues purchasing from your company. Multiply customer value by the average customer lifespan. The multiplication will give you the revenue you can reasonably expect an average customer to generate for your company throughout their relationship with you.
Its report measures the weekly purchasing habits of five customers, then averages their total values together.
By following the steps listed above, we can use this information to calculate the average lifetime value of a Starbucks customer. Download Now. First, we need to measure average purchase value.
We can calculate this by averaging the money spent by a customer in each visit during the week. For example, if I went to Starbucks three times and spent nine dollars total, my average purchase value would be three dollars.
Sample size is also important, and unfortunately, the scientific method often falls by the wayside in business. The primary reason LTV is so important for your SaaS business is that it drives what you can spend to acquire new customers. Generally speaking, users on your lowest-priced plans will also have the highest churn, making it your most dismal LTV compared to the other plans. And remember what we said earlier?
LTV drives what you can spend to acquire customers. Knowing your average customer lifetime value is nice. But just looking at a number on a graph won't help you grow your business. So next, we're going to talk about how to use lifetime value analysis it's easier than it sounds and other tactics to improve your LTV. All the tactics I'm going to show you can be done directly in Baremetrics.
If you want to follow along, you can sign up for free here. When your goal is to improve your customer lifetime value, a good place to start is speaking to your existing customers. Step one is to find out what your current average LTV is.
I'll grab ours from our Metrics dashboard. Could you spare 15 minutes for a quick call to answer a few questions? Hope to hear from you soon! And always include a link to schedule a time for the call with something like Calendly or Doodle.
Then just start gathering the feedback and organize it in a spreadsheet. Look for trends that you can use to improve the LTV of your other customers. For instance, if you notice most of these customers came from a specific channel SEO, Google Ads, email, etc. Or maybe most of them use a specific feature of your product. You can start marketing that feature more since customers get the most value from it. The interviews can be a huge helping hand in how you develop and market your product going forward.
Looking at your LTV as a single number is nice to give you a 10, foot view. But in order to make it more actionable, you need to break it down into smaller groups so you can identify trends. You need to know what the LTV is of each major customer segment.
Our lowest plans have significantly less LTV, despite having the most number of customers. This is pretty common for SaaS companies. Customers on lower-priced plans tend to churn more, and they pay less. And customers on our higher-priced plans tend to stick around longer and generate more revenue for us. Pricing plans are only one way to segment your customers though.
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