How to Calculate & Improve Customer Lifetime Value, Customers are the backbone of any company’s success. Every successful firm has a large number of consumers who return to make another transaction, spending more money over time. As a result, it became vital to convert this knowledge into a metric that could be used to better understand their clients and make educated business decisions to improve their various business operations.
As a result, in the 1980s, the term “customer lifetime value” became popular, and it is now one of the most essential indicators that all firms monitor and analyze before making major business choices.
The Lifetime Value (LTV) of a user is one of the most crucial metrics to understand when thinking about the direction your organization is going in. Different LTV models can help you figure out how much you can pay to acquire a user, how losing users affects your overall income, and how changes to a product affect the total revenue you can expect from a user.
What is Customer Lifetime Value?
Customer Lifetime Value is the total amount of money a customer will spend on your products or Customer services throughout their interaction with your company. It is a forecast of a company’s net profit based on interactions with customers and their loyalty to a brand.
Customer lifetime value covers more than just the money spent on individual orders. It is all about the long-term benefit of returning customers. CLV is a tool that allows you to target your marketing efforts. Make smarter choices when it comes to customer retention and segmentation. Increasing CLV equals increasing profitability.
Why is customer LTV so important?
CLV determines the worth of a customer, which is crucial information for determining how much you can spend to acquire a new customer while maintaining acceptable profit margins.
You’ve reached profitability when a customer’s total revenue exceeds the cost of acquiring them (including all logistics, shipping, and labor costs, among other things).
There are several reasons to monitor and utilize CLV:
You Can’t Improve What You Don’t Measure: Once you start evaluating customer lifetime value and breaking it down into its numerous components, you can use particular pricing, sales, advertising, and customer retention methods to reduce costs and increase profit.
Improve Customer Acquisition Costs Decisions: You can boost or decrease spending to guarantee you maximize profitability and continue to attract the correct types of clients after you know how much you’ll make from a typical customer.
Improved Forecasting: CLV predictions assist you in making informed decisions about inventory, staffing, production capacity, and other costs in the future. Without a prediction, you risk unintentionally overspending and wasting money, or underspending and finding yourself unable to meet demand.
CLTV’s Importance in Sales – Even for sales teams, knowing a customer’s CLTV is critical information. For a high-value client, for example, the sales pitch would be different: To maximize revenue from clients with high CLTV, a sales manager would look to incorporate a lot of value-added services.
Clients having a lower CLTV would receive a sales pitch geared toward maintaining the customer and providing them with special offers and discounts.
CLTV’s Importance in Marketing – Any marketer’s goal in establishing lifetime value is to ensure that their marketing activities are lucrative. CLTV is a metric that indicates how likely a marketing campaign’s ROI will be. It assists marketers in optimizing campaign budgets and provides clarity on how much to invest in which client category.
How to Calculate Customer Lifetime Value?
Businesses that use ERP software don’t have to bother about the CLV math. All of the computations are done for you by the system. However, if you want to calculate client lifetime value manually, use the methods and formula below.
Calculate the Average Order Value: Begin by calculating the average sale value. Consider using a one- or three-month period as a proxy for the entire year if you haven’t been recording this data for long.
Calculate the average number of transactions each period using the following formula: Do customers come in numerous times a week, as they might at a coffee shop, or only once every few years, as they might at a car dealership? CLV is heavily influenced by the frequency of visits.
Customer Retention Metrics: Finally, you’ll need to figure out how long the average consumer stays with your company. Some brands, such as technology and automobiles, generate long-term loyalty. Others, such as petrol stations or retail chains, may have a lower level of consumer loyalty.
Calculate the Lifetime Value of a Customer: You now have the necessary inputs. To compute CLV, multiply the three integers together using the formula below.
Here’s the formula to calculate customer lifetime value:
CLV = Average Transaction Size x Number of Transactions x Retention Period
What role does lifetime value play in other SaaS metrics?
The Customer Acquisition Cost, or CAC, can be calculated using your LTV. The CAC is a figure that represents the cost of acquiring a new customer. Create a revenue per customer to cost per customer ratio by combining these two parameters.
The LTV: CAC ratio is the term for this. You may bet on a successful and viable company model if the LTV: CAC ratio is at least 3:1. You’re looking at a losing bottom line if you’re averaging a 3:4 ratio. Simply put, it costs you more to recruit a customer than it costs you to keep the lights on.
When designing your pricing strategy, it’s critical to keep your LTV: CAC ratio in mind, because maximizing LTV through pricing will assist maintain your LTV: CAC ratio high.
13 Ways to Improve Customer Lifetime Value
Finally, we must remember that maintaining customers is far more cost-effective than gaining new ones and that existing customers account for the vast majority of our revenue.
As a result, the task is to increase the lifetime value of our current clients. Here are a few tried-and-true methods for achieving just that.
1. Increase CLV via email marketing
Lack of customer touch is the most common reason for customers to cease buying from a firm.
When it comes to communicating with your consumers, email is one of the most powerful tools at your disposal.
Sending regular emails to your customers benefits your company in at least two ways. First and foremost, they serve as a reminder to customers about the services you provide. Unfortunately, many clients will place one order with you and then forget about you the next time they need to buy something. Emails keep you in their thoughts.
Second, emails enable you to emphasize exceptional bargains and offers, which can help you retain some clients while rekindling interest in others who have fallen out of favor.
2. Increase CLV by focusing on customer service.
Be direct and proactive in your communication. Use email automation and delivery tracking systems to communicate how long deliveries will take. Set reasonable expectations and then live up to them. This boosts brand trust, which is vital to four out of five consumers.
Correct your mistakes. When something goes wrong, reach out to customers across several platforms rather than waiting for them to contact you. Make sure you express empathy for their predicament and apologize for any inconvenience you may have caused them, and then provide a solution.
More than two-thirds of customers would be willing to buy from a company that reships lost or damaged items quickly.
3. Encourage customers to renew their subscriptions.
If you want to improve lifetime value, you must, of course, lengthen your customers’ lives.
This entails figuring out how to get people to pay for your services over a longer period. When it comes to subscription models, the majority of your clients are likely to pay monthly, with the possibility that any quantity could stop their memberships at any point.
As a result, if you can persuade more of these customers to switch to an annual subscription, you’ll reduce customer churn while also increasing the average customer lifetime (Y).
Incentives are required in such a case. You may, for example, give consumers who upgrade to an annual subscription two months free. This strategy also has the added benefit of providing a cash flow boost — available funds that can be used to augment future growth and business/service improvements.
4. Loyalty or Rewards Programs for Customers
Customers are kept interested and regular purchases are rewarded through customer loyalty programs. Popular examples are airline frequent flyer programs and restaurant punch cards. Customers that are rewarded for returning might enhance their purchase frequency and length of time with a business.
5. Expansion of product lines
Give your clients more than just add-ons; give them entirely new things to buy and keep. You’ve already gotten them in the door, now make the most of it by adding products to their workflow. Overall, these solutions should be tied to your primary product at the very least to foster synergy between your product and customer success teams, although this isn’t required.
6. Customer Onboarding could be improved.
Some clients are unsure what to do after purchasing a product or service from a company. Over time, successful firms design a course for their client connections. In many sectors, turning a one-time customer into a source of recurring revenue is critical for growth.
7. Cross-Sell and Upsell
Retaining or upselling an existing customer is generally easier than acquiring a new one. Upselling and cross-selling are marketing methods that urge customers to purchase more expensive or more products or services at once rather than a cheaper choice.
8. Invest in software and technology.
Processes can be automated, and much of your business data can be tracked and centralized using technology. To manage all of this data, some firms rely on basic technologies like email, spreadsheets, and contact databases, but it’s much easier to use proven, packaged software packages. The change will be noticed by your customers.
9. The Internet and Social Media
Reaching out to your clients in locations where they already spend time is one of the finest ways to attract their attention. Social media sites such as Facebook, Instagram, Twitter, and TikTok are useful for both advertising and customer interaction.
10. Make purchasing Simple
The cart abandonment rate is a measure used by online retailers to track how many customers begin shopping but quit the transaction before completing it. This can also apply to in-person shopping experiences, where too many selections and packing can turn off shoppers. You’ll be able to capture every conceivable transaction if you create a simple purchase experience.
11. Feedback Loop with Customers
If a customer has a negative experience, it should not be ignored. In addition to depending on customer service to resolve the problem, businesses should collect consumer input regularly to improve the customer experience. Iterations and repairs to a product or service regularly can help to resolve issues and improve customer satisfaction.
12. Remarketing and retargeting should be used.
You can ensure that your ads appear in front of your clients again and again by using remarketing technologies like the Facebook Pixel. The pixel is placed in a visitor’s browser when they visit your site.
Then you can target Facebook advertising directly at these visitors, so your brand appears frequently as they scroll through their newsfeeds. This method, if successfully applied, can result in customers returning and time again.
13. Customer Relationships Should Be Nurtured
We all want to be liked and appreciated, and sometimes all it takes to show your loyal consumers that you care is a simple, personalized thank-you note.
Reach out to them via email or social media regularly to maintain the relationship.
This strategy works best when you offer something away based on the customer group – for example, as a thank you for their business, you may upgrade your customers to faster, cheaper, or even free shipping on all future orders. If they’re already paying for a service, why not give them a discount for a few months or a free upgrade to a premium plan?
Conclusion
Customer LTV is significant since it represents not just how well your company’s retention efforts are working, but also how much income you’re pulling in in comparison to the expense of acquiring new customers (CAC).
The LTV: CAC ratio is one of the finest indicators of your company’s profitability, and the lower your LTV, the more unfavorable it will be. This enables a business to estimate profitability, create client acquisition budgets, and define growth and improvement goals.
One of the most essential metrics to focus on is increasing client lifetime value. Because the costs of acquisition are so much greater than the costs of retention, developing a strategy to maximize revenue from your existing client base is a winning move.
FAQs
How do you calculate customer lifetime value and increase?
The typical formula used to calculate customer lifetime value is Customer lifetime value = customer value x average customer lifespan. It's essential for customer success and support teams to understand CLV because it's always less expensive to maintain an existing relationship than to create a new one.
Why do we calculate customer lifetime value?
Customer lifetime value is important because it allows you to maximize the value of every customer relationship. This means that you're providing a better customer experience that keeps people around for longer, which can also help improve the quality of your products and services.
How do you calculate CLTV?
The CLTV ratio is determined by adding the balances of all outstanding loans and dividing them by the current market value of the property. For example, a property with a first mortgage balance of $300,000, a second mortgage balance of $100,000, and a value of $500,000 has a CLTV ratio of 80%.
How do you calculate customer lifetime value answer?
Customer Lifetime Value is calculated by multiplying your customers' average purchase value, average purchase frequency, and average customer lifespan.
Can we predict customer lifetime value?
To accurately predict CLV for the set time period, a comparable period of historical data is required. For example, if you want to predict CLV for the next 12 months, have at least 18 – 24 months of historical data. Set the time frame in which a customer must have had at least one transaction to be considered active.