Customer Lifetime Value: How to Calculate It for Your Business
Want to measure the financial value of your customer's loyalty? Most organizations bank on the customer lifetime value (CLV) metric. However, there's a catch.Mapping a customer's lifetime value is hardly one-dimensional; it requires aligning organizational metrics and customer minds. Assessing CLV is important to understanding revenue generation from customers throughout their relationship with the brand. In this guide, we will explore why CLV is important and how to calculate it correctly.
Want to measure the financial value of your customer’s loyalty? Most organizations bank on the customer lifetime value (CLV) metric. However, there’s a catch.
Mapping a customer’s lifetime value is hardly one-dimensional; it requires aligning organizational metrics and customer minds.
Over 90% of US consumers plan to switch brands. Assessing CLV is important to understanding revenue generation from customers throughout their relationship with the brand. In this guide, we will explore why CLV is important and how to calculate it correctly.
What Is Customer Lifetime Value?
Let’s start with the customer lifetime value definition. Customer lifetime value tracks how valuable (read: profitable) a customer is to your company.
Why Customer Lifetime Value Matters
Customer lifetime value offers four-fold benefits for businesses:
- Increased revenue: It provides a long-term picture of who your brand’s most profitable customers are. This way, you can pursue ideal customers with targeted selling and boost revenues.
- Prompt issue identification: CLV leverages real-time customer data (think spending behavior, likes and dislikes, etc.) to identify where your brand is falling short in terms of product features, service quality, and more. These insights and trends help drive contextual action items and keep the teams moving in the right direction.
- Targeted customer segmentation: The way to brand-building and converting a first-time prospect into a brand loyalist lies in a data-driven approach. It entails assessing customers based on needs, profitability, and specific behavior. Analyzing CLV helps you to understand which customer is spending more on your brand, create a personalized customer acquisition strategy, and target said customers with relevant messaging.
- Reduced customer acquisition costs: It’s a given fact that retaining existing customers is more profitable than acquiring new ones. CLV leverages word-of-mouth publicity and customer loyalty to lower marketing costs. As your brand focuses on retaining loyal customers, you can improve the value long-term customers bring to your business.
How to Calculate Customer Lifetime Value? Key Metrics + Tips
Strategic customer lifetime value analysis rests on two customer lifetime value models. The basic difference between the two lies in what your end goals are:
- Machine Learning-based Predictive CLV: Looks at current (existing and new) customer data to predict their future behavior, understand your most profitable product/service, and figure out your most valuable customers.
- Historic CLV: Evaluates past data such as average order value to predict the value of a customer but does not factor in future purchasing behavior, potential growth, or changes in customer preferences over time.
Customer Lifetime Value Formula
To calculate CLV, you need first to calculate the customer value. Here’s how to do it:
Step 1: Determine the Average Purchase Value by dividing the total amount of money received by the total number of purchases made within a given time frame.
Step 2: Divide the total number of purchases made in the same period by the total number of unique customers to get the Average Purchase Frequency Rate.
Step 3: Multiply the average purchase value by the average purchase frequency rate to determine the customer value in step three.
Step 4: After you have the customer value, multiply it by the typical customer lifespan to get the customer lifetime value or CLV.
This gives you an estimate of the total revenue you can expect from a customer over their entire relationship with your business.
Four Customer Lifetime Value Metrics Worth Measuring
You can calculate CLV in multiple ways:
1. Average Purchase Value (APV)
Formula: APV = Total Revenue/Number of Orders
This metric is useful for understanding:
- Average revenue a customer generates within a timeframe (usually one year)
- Opportunities for upselling, cross-selling, and increasing each transaction’s value
- The effectiveness of your product, as well as pricing strategies
2. Average Customer Lifespan (ACL)
Formula: Sum of customer lifespans/Number of customers
Where customer lifespan is the average duration a customer continues to make purchases from your business. It’s the period from their first purchase to their last.
This metric helps:
- Gauge how long a customer’s relationship will last with your brand and build strategies around lowering churn
- Drive data-backed costing and resourcing decisions while informing your marketing strategy
- Analyze the ROI of your customer acquisition efforts and identify profitable acquisition channels
3. Customer Value (CV)
Formula: CV = Average purchase value/Average purchase frequency rate
This metric is essential for understanding:
- What each customer brings to your business
- Which customers have the highest impact on your bottom line
- How to segment customers based on their spending habit
4. Average Purchase Frequency Rate (APFR)
Formula: APFR = Number of purchases/Number of customers
This metric offers insights into the following:
- How frequently customers buy from your brand
- Level of customer loyalty and engagement
- Churn rate and future opportunities for revenue
5. Tips to Increase Customer Lifetime Value
With a solid understanding of what customer lifetime value is, let’s look at how you can improve it:
Tip #1: Revisit Your Welcome Strategy: Perfect Your Onboarding Experience
Your onboarding process must help customers get up to speed on:
- What your product offers
- Why they should choose your offering
Ideally, your onboarding process should kickstart within the first few days of the customer’s purchase. Use these tips to deliver a seamless onboarding experience:
- Personalize your onboarding workflow using customer data to:
- Offer custom deals
- Suggest curated product bundles
- Send follow-up emails and gather feedback via surveys
- Set up a live chat or knowledge base to empower customers with quick support
- Track important onboarding KPIs such as time to first interaction, customer activation rate, and so on
Tip #2: Level Up Sales: Personalize for Higher Order Values
Upselling and cross-selling are the best ways to boost the customer’s average order value. And the secret sauce of this is to personalize the customer’s shopping experiences with:
- Customized complementary product suggestions on checkout
- Group products with similar pricing to entice the customer
- Provide tiered pricing options to new and existing customers and help them upgrade easily
- Roll out personalized promotions with incentives aligned to specific customer segments, such as high discounts for returning customers
Case-Study: How Spencers Used Insights-led Personalization to Drive 30% Conversion Across Cart Abandonment Campaigns
The Challenge:
- Lack of an intelligent engagement platform to resolve issues related to deliverability and cross-channel communication
- Low data transparency as a result of the current martech solution’s limitations
The Strategy: The brand invested in robust customer journey orchestration tool to:
- Segment customers based on frequency, recency, and monetary value of customer transactions
- Reach the right customer with the right offers meaningfully
- Promote an insights-driven strategy and raise the conversion rate for campaigns that are installed, registered, and cart-abandoned
- Promote in-app messaging with personalized mobile campaigns
- Use AI-powered targeted push notifications to get more customers to buy from the brand
The Result:
- Reduction in the first order date from 7 to 5 days
- 30% conversion rates across cart abandonment campaigns with personalization
- 10% uplift in conversion rates on cross-sell campaigns
- 15% increase in LTV
- 10% improvement in repeat purchases using WhatsApp as a channel
Tip #3: Build Bonds: Cultivate Strong Customer Relationships
Transactional relationships will only take your brand so far. The secret lies in building an emotional connection with the customer while making them feel good about their recent purchase—a strategy that Kitsch masters gracefully.
In the first half of the email, the brand applauds the customer for going “bottle-free,” making them feel good about being environmentally conscious:
Source: Screenshot from Gmail
In the middle part, the brand recommends relevant products:
Source: Screenshot from Gmail
The brand ends the email with insights into its environment-first initiatives to gain customer trust:
Source: Screenshot from Gmail
You can also connect with customers on your brand’s social media handles by addressing their queries promptly, sending freebies and giveaways, tagging loyal customers and thanking them for their loyalty, and more.
If you want to elevate your customer-brand connection, engage in powerful storytelling as Nike does with its posts—rarely will you see a product promotion on its Instagram handle:
Tip #4: Hear and Act: Respond to Real-Time Feedback
To get an insider’s perspective into how customers truly feel about your brand, you need information from the horse’s mouth.
Get real-time feedback from customers immediately after their purchase to get authentic answers, as Lazada demonstrates below:
Source: Screenshot from Gmail
Active listening will demonstrate your brand’s genuine interest in hearing your customers out. It will paint an empathetic impression and tell your customers you value their opinions.
Tune into your customer’s advice, loop in key stakeholders, rank the feedback based on priority, improve your marketing, communicate to customers about your action, and boost your brand’s CLV.
Tip #5: Empower with Tech: Enhance Self-Service Options
Want customers to connect with your brand? Make it easy for them.
Take, for instance, Nordstrom’s live chat service. The brand lists common questions customers may have and allows them to search and self-serve instantly:
In addition to setting up live chat, you can create a comprehensive knowledge base with how-to tutorials and FAQs.
In terms of action, if customers send an email with a query, respond as quickly as possible. If they’ve called the brand’s customer care number, don’t put them on hold endlessly. If they’ve tagged your brand on social media with a complaint, respond within minutes with actionable next steps.
You must leverage the power of technology and human agents to give customers the best of both worlds.
Customer Lifetime Value: The Compass for Your CX
There needs to be a change in mindset if marketers want to transform the customer experience, says Tom Fishburne, of Marketoonist fame.
This starts with keeping a pulse of your customer’s needs in real time. If your brand is not in tune with your customer’s requirements when it happens, it can lead to a breakdown in CX.
One sure-footed way to monitor your ideal customer base is to evaluate their lifetime value (CLV). Use CLV to your advantage and drive meaningful customer engagement throughout their lifecycle.
