Growing Business Guide: How to Measure Customer Lifetime Value
What’s the best way to grow your business? Understanding how to measure your customer lifetime value, find out here.
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When we talk about the value of a customer, the first thing you think of might be profit. Specifically, the profit margin of their purchases. Although to really analyze the value of a customer, we need to look a bit deeper.
So you made a sale, but your relationship with the customer doesn’t end there. Is this customer likely to buy from you again? Would they recommend your business to a friend? Knowing these things, or being able to predict their likelihood, can make a big difference to your success.
One statistic that can help you answer these questions is Customer Lifetime Value (CLV). It can help you make acquisition cost decisions. It can even help inform your overall marketing strategy. CLV is an important value for customer analytics.
First, you need to know how to calculate CLV and how to use the data effectively.
What does CLV mean?
Customer Lifetime Value is just as it sounds. That is, the value a customer will provide your business over the time they do business with you.
CLV = Customer Value x Customer Lifetime
A simple example would be a subscription service. If a customer pays $10 monthly and subscribes for a year, their lifetime value is $120. (10 x 12 = 120). However, knowing a single customer’s value isn’t very useful.
Instead, you want to get the average value of all of your customers. This involves working out a few other figures first, which we’ll cover in more depth below. Once you have this figure, you can then begin to use CLV to your advantage.
As well as looking at average revenue, you can use this figure as a basis to work out an average profit. You can also begin to break down the data into segments. This will let you identify your highest-value customers and demographics.
How to Calculate CLV
To calculate your business’s CLV, you’re going to need to gather sales data. First, you’ll need to work out Average Purchase Value (APV) and Average Purchase Frequency (APFR). The typical starting point is with yearly figures but we’re going to use a monthly example for simplicity.
APV & APFR
These figures should be relatively simple to extract from your customer data.
APV = Total Revenue / Number of Orders
Let’s say the example subscription business above has 1000 subscribers. 500 have $10 subscriptions, and 500 have $20 subscriptions, monthly. Revenue in one month would be $15000 (500 x 10 + 500 x 20). So APV would be 15000 / 1000, or $15.
Then, we need to look at the purchase frequency.
APFR = Number of Purchases / Number of customers
In the same month, APFR would be 1. That’s 1000 purchases divided by 1000 customers. We can then calculate that the Customer Value (CV) for this month is $15 (15 x 1).
CV = APV x APFR
But, over a period like a year or more, subscriber values are unlikely to stay perfectly consistent. That means we need to work out the average time a customer will stay with the business.
Average Customer Lifetime
Continuing the example from above, we need to work out how many months your average subscriber will continue their subscription. We need to calculate the Average Customer Lifetime (ACL)
ACL = Sum of All Customer Lifetimes / Number of Customers
To keep things simple, we’re going to say that the average customer subscribes for 12 months. You’ll need to work out your true numbers with the formula above. Once we have this figure, we can move on to the CLV calculation.
The CLV Formula
Now we come to the important formula. We’re going to need to take the figures we worked out for the CV and ACL and put them together.
CLV = Customer Value x Average Customer Lifetime
So for our example subscription business, CLV is $180 (15 x 12). Obviously, the figures you’ll be using from a real business will be a bit messier than this. The core formulae will remain the same, though.
Why Calculate CLV?
Now we’ve got the CLV nailed down, let’s talk about how to use it to your business’s benefit. The most obvious comparative metric in your business is your customer acquisition cost.
It makes sense if you know how much each customer is potentially worth – then it’s easier to know what a reasonable cost to acquire each customer will be. You’ll notice that the customer value will be different for certain segments.
When we break the figure down by CLV values for your various marketing channels, you might see that some channels bring in more average revenue. Information like this lets you optimize your marketing spend.
It’s important to remember that CLV as an average is a predictive figure. It won’t always be 100% accurate for every customer. It’s a useful marker to keep in mind when making budget decisions, though.
Measuring your CLV can give you insights into your customer base. You can use the data to work out who your highest-value customers are. Once you know that, try gathering feedback from your customers.
Find out what your best customers like about your business. Why do your most loyal customers stay with you? What factors make you stand out from competitors? Identify your weakest areas too. What are your largest points of attrition?
Identifying factors like these lets you play to your strengths while fixing your weak points. You can integrate existing customer data. If your customer service team has a voice in the customer program, for example.
You can use the data you gather when working out your CLV combined with customer lifecycle software to drive a customer-focused strategy that increases your conversion rate.
Working out the habits of your customer base doesn’t just help with acquisition costs. Once you’ve identified your highest-value customers and their preferred marketing channels, you can then put the products those customers want to see front and center.
This kind of targeted advertising can be highly effective when done well and can often be made easier with the help of marketing automation. It lets you target the most effective channels to acquire new high-value customers. It also gives you more opportunities to give your best customers more of what they want.
You can even separate the buying habits of your individual customer segments. Then use this information to improve your marketing campaigns. Different strategies will be needed depending on your business.
Boosting Your CLV
Customer lifetime value isn’t a static figure. You can improve its value over time. Fortunately, once you’ve gone through the task of data gathering and working out CLV it becomes easier to improve it.
1. Improve Customer Satisfaction
At every stage of the customer journey, there are opportunities to increase customer satisfaction. The more you improve this, the more you’ll see your CLV climb. Happy customers will stay with your business longer and spend more.
Make sure you are engaging your customers on the channels they use. Also, look into the differences between CSAT and NPS scores to see how satisfied your customers currently are with the service you provide.
Use the feedback you’ve gathered to address customer concerns. If your customers know you listen to their feedback, they’ll be more willing to share their experiences.
Maybe your customers are demanding same-day delivery. Or they want toll-free numbers to contact customer service. Make the changes your customers want to see. When customers know you’re listening, satisfaction goes up.
2. Upselling & Cross-Selling
Think back to the other figures like APV that make up the CLV calculation. Increasing any of those numbers will drive up CLV. Your APV can be increased by focusing on opportunities for upselling and cross-selling.
Both of these terms are about increasing the order value at the point of purchase. Offering customers a larger or premium version of a product is upselling. Offering them an additional, usually related, purchase is cross-selling.
You’ll have seen examples of these with online shopping carts. The “customers frequently bought together” section? That’s cross-selling. As you probably know, it can be highly effective at encouraging additional purchases.
3. Personalize Your Services
Personalized service is important. Monitoring your customers’ preferences and tailoring your services accordingly will provide a better customer experience. According to this PWC report, the most important factors to the consumer are convenience and experience.
You can automate your business processes to personalize your services can tackle both of these factors at once. If you can anticipate your customer’s needs, you can serve them more effectively. Whether that’s by answering queries faster or listening to concerns.
Customer service that can anticipate issues, more convenient ordering, and delivery services. Or customized loyalty plans and rewards. There are a number of ways you can apply personalized service.
The important part is driving up your customer engagement. Your customers want to feel that you value them as an individual, not just as one of many sales figures. This can also be reflected in your company’s culture, so stand up for the social issues you and your customers care about.
Knowing your CLV is only as valuable as what you do with the data. You can use it in combination with metrics for customer satisfaction and customer data to gain valuable insights into your customers. As well as insight into your marketing and customer acquisition.
Combine existing customer data from your CRM system and you can learn about your customers’ habits. Segment, effectively target, and effectively serve your customers. See this guide for more on what is CRM integration.
The formulae above will guide you to the figures you’ll need. Remember, that’s just the first step in using CLV to help your business.