The field of marketing is loaded with abbreviations and acronyms to describe the concept of Customer Lifetime Value CLV. You will hear about CLV, LCV, CLTV, or LTV Marketing, but the idea is the same: it describes a customer`s value to a company over a certain period.
As simple as it may seem, CLV continues to be one of the most underrated metrics in marketing, mostly because businesses have a hard time figuring out what it is and how to measure it. In 2018, it was taught that one-third of the marketers surveyed were aware of the term, while only a fourth of the respondents considered their company was monitoring this metric properly.
What is Customer Lifetime Value?
If we were to create the ultimate Customer Lifetime Value guide, first we’d have to clear the air in terms of definitions: CLV is the predicted net profit of the whole business-customer relationship. Brands will always want customers with high lifetime value because this indicates a strong attachment for spending money in that brand`s online and offline stores.
CLV will ultimately tell you how much an existing customer is worth for your business so you can better understand the amounts you should further invest in customer retention. Furthermore, customer lifetime value will give you an indication on whether or not you can expect a client to become a regular. They might be just on-time clients, but using CLV will give you just enough insight to make the right call.
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Why is customer lifetime value important?
Because customer behavior is so diverse and unpredictable nowadays, figuring out a customer`s CLV will help you answer a problematic dilemma: how much money can you make out of one individual in the long run.
Companies still running their businesses in 2020 found themselves in an extremely competitive market, where price or design are no longer the deciding factors in a customer’s decision. That’s why CLV became an important base to build upon to increase revenue from the less valuable client, and develop customer experiences overall.
Especially in eCommerce, customer lifetime value is now more important than ever because, first of all, it’s a simpler and faster path to a very important goal in marketing strategy: revenue through customer retention. The best way to maximize CLV is by spending big portions of your marketing budget not on acquisitions, but retention. In eCommerce, 60-70% of sales are to existing customers, while only a fifth of your product will go to new shoppers. Also, returning customers are bigger spenders by 67%, which means there is no reason whatsoever to move your focus from retention. Last but not least when talking about CLV, expert marketers consider it a more profitable path to revenue and customer loyalty because the Pareto Principle will tell us that roughly 80% of a brand`s revenue comes from 20% of its customers. Using CLV principles it will be way easier to segment the high-value customers, and then target them with specific campaigns, perfectly designed to increase their brand loyalty and their overall spendings.
How to calculate customer lifetime value?
As lots of marketers ended up finding out, there is no use knowing that CLV is important for your clients if you are not able to accurately calculate customer lifetime metric. Finding the ideal customer lifetime value formula is not an easy task mainly because there are a myriad of ways to determine it.
One way to do it is by using a model.
- First, you will calculate the average purchase value by dividing your company’s total revenue by the number of total purchases. Make sure you use numbers gathered from the same timeframe.
- The next step is to calculate the average purchase frequency rate. You do that dividing the number of purchases by the number of unique buyers who bought your services during that certain time.
- Then you will have to determine the customer value by multiplying the average acquisition cost with the average purchase frequency rate.
- Step number 4 is to calculate the average customer lifespan and then you will have your formula for CLV:
Multiply customer value by the average consumer lifespan and the result will be the return you can logically expect a standard customer will generate for your brand throughout your collaboration.
CLV = Customer Value x Average Customer Lifespan
How to improve Customer Lifetime Value?
In a business environment where brand loyalty is most of the time just a dream for naive marketers, enticing customers to buy with regularity is a big challenge. It is known that customer lifetime value CLV increases when buyers reach their third purchase and studies also show that emotional connection with brands results in tripling the lifetime value. But there are a variety of tactics to increase your customer lifetime value and here are some of the most efficient.
- To improve your customer lifetime value, first, you have to work on some other metrics equally important for the outcome. Start by checking if you are having trouble getting customers to increase their spending. Some smart campaigns involving incentives and product bundles might do the trick so you can move to the next item on your agenda.
Improving your purchase frequency is equally important because often medium spendings are more important than one-time high spenders. To make sure you make the right move in this area, check if the communication channels are used by your customers and make changes if the answer is negative.
- Also important is to improve your gross margin or GM. Because it doesn’t matter how many sales you have or how valuable they are as long as you don`t get enough profit out of them. Consider using a price optimizer so you can discover the fitting selling price and then have more room for profit maximization. Keep in mind that the customer lifetime period (or Churn Rate) is also influencing your CLV. This is a very complex metric and it requires special attention to the customer loyalty part of the business.
Additionally, it became fairly easy to collect data from your customers, so there is no excuse for not using that information for marketing automation purposes.
- Everyone loves a good old survey because we feel that our opinion will somehow change the process for the better. By incentivizing customer profiling you make a one-time expense but gather important data that can be used to give personalized product suggestions.
- Badges and challenges are an amazing way to get your customers involved. More and more, brands are using gamification to boost their exposure and, more importantly, sales. Customer Lifetime Value is highly influenced by a brand`s ability to cultivate repeated behavior that would give members a sense of accomplishment.
- Birthday rewards are maybe the best way to impact customer lifetime value. During the best day of the year for most of us, nothing better than realizing your favorite brand is celebrating you. A personalized email that comes in the form of a happy birthday card but also lets you know you received a small gift might be the perfect formula especially because it will be unexpected. Don`t be surprised when you check your data and see most customers will access your website right from the birthday card and even make a purchase using the discount they have received.
- Customers also love tiered programs because the sole concept of climbing a ladder to unlock certain perks it’s appealing for almost every one of us. To increase customer lifetime value with a strategy like that, you will have to associate each rank with rewards worth the effort and the spendings.
- Because not everyone was the most popular kid in high-school, VIP Clubs are a great way to increase your CLV. Most of the time, clients will happily spend plenty of funds to gain access to a VIP Club, and after they are in they will gladly use their benefits and spend some more. VIP Clubs allows you to put in motion an inclusive loyalty campaign that anyone can join by simply paying. At the same time, this approach will keep some of your most popular benefits for your most dedicated customers.
Having all your customer data in one accessible place, using a main dashboard for communicating with buyers through all the available channels, predictive analytics capability, and qualified human resources to monitor data streams and communications might be all you need for optimally using CLV. As you can now see, customer lifetime value is influenced by many circumstances. This will bring a sense of freedom for your marketing strategy because you can mix-and-match features and you`ll always be able to make changes where needed.