Customer Lifetime Value is a metric that measures the economic value that a customer generates for a company throughout their relationship with it. In other words, CLV is the result of adding the value of the income that the customer generates in each transaction, during a certain period of time.
In an increasingly competitive business environment, companies face the challenge of optimizing their resources to increase their revenue and profitability. In this context, Customer Lifetime Value (CLV) has become a key tool for managing customer relationships.
How to calculate Customer Lifetime Value
The formula to calculate CLV is as follows:
CLV= (average customer purchase value x resale rate) x customer lifetime – customer acquisition costs
So that we can see one of the simplest ways to calculate CLV, we are going to propose this example:
- Average purchase value of a customer = €50
- Resale rate = 3 purchases per year
- Customer acquisition costs = €20
- Number of clients at the beginning of the period (CI) = 100
- Number of clients on a given endpoint (CF) = 150
- Number of new customers acquired (CN) = 70
- Time period = 1 year
The customer retention rate and length of customer life with this data would be:
- Customer retention rate = [(CF-CN) / CI] = [(150-70) / 100] = 0.80, that is, we have an 85% customer retention rate
- Customer lifetime = 1 / (1- customer retention rate)= 1 / (1-0.80) = 5, i.e. customer lifetime is 5 years
- Finally, the Customer Lifetime Value would be: (€60 x 5) x 6.6 – €20 = €1,960
As we can see, Customer Lifetime Value is an important metric for companies, since it allows them to evaluate the profitability of their customers. A high CLV indicates that a company’s customers are profitable, while a low CLV indicates that the customers are less profitable.
To calculate it, it is necessary to collect data on the average purchase value, purchase frequency and average customer lifetime. This data can be captured through CRM systems, data analysis and customer surveys. Once this valuable indicator is calculated, it can be used to make relevant decisions about the marketing and sales strategy. For example, a company can focus its efforts on attracting and retaining customers with a high CLV.
Customer Lifetime Value Profits
Among the main uses of the concept, we can highlight the following:
- Evaluate customer profitability
As we have already mentioned previously, it provides us with a measurement that allows a classification based on how profitable the clients are. Based on this, actions can be taken aimed at enhancing or improving this level of profitability. This information makes it easier to make an adjustment to the marketing budget with very specific approaches.
- Identify opportunities for improvement
Simply focusing your efforts on attracting and retaining customers with a high CLV is already a productive strategy. As obvious as it may seem, in many cases this is not carried out.
- Make strategic decisions
Another utility worth highlighting is that this indicator helps companies make strategic decisions, such as the allocation of resources or the development of new products and services.
For example, a mobile phone company can use CLV to determine how much it should pay its sales agents for each new customer it hires. Otherwise, an e-commerce company can use it to decide whether to offer free shipping to its customers. On the other hand, a subscription services company can take advantage of it to determine how often it should send promotional emails to its customers.
- Evaluate the performance of marketing channels
Companies can use the information provided by CLV to evaluate the performance of their marketing channels. For example, if the CLV of a marketing channel is low, companies may consider changing their marketing strategy on that channel.
- Define sales objectives
Another interesting aspect is being able to rely on the information provided by the indicator in order to define sales objectives. For example, if CLV is high, more ambitious sales goals can be set, which in turn leads to improved financial results.
Despite all this, it is important to keep in mind that CLV is an estimate that can fluctuate depending on factors such as customer behavior, the economy, competition and other variables in the competitive environment.
How to improve Customer Lifetime Value
Improving Customer Lifetime Value (CLV) is essential to boost profitability over time in a business. Some tips to increase Customer Lifetime Value would be to offer an optimal customer experience, develop loyalty programs, personalize offers and promotions and/or use data analysis to identify opportunities for improvement.
The continuous monitoring of the CLV allows us to study the customer’s purchasing behavior over time and understand if, among others, the investments made in marketing actions have been effective in attracting a new type of customer or if perhaps it is advisable to focus on retention. . If we apply the famous Pareto Law to this area, 80% of profits come from only 20% of customers. Therefore, concentrating marketing efforts on this smaller, but more active, percentage of customers may be the most efficient strategy.
Below, we are going to highlight some strategies that aim to boost customer loyalty and retention.
- Launch a loyalty program
Different studies and market analyzes have shown that rewards programs are effective in promoting loyalty. Creating a gamified experience by offering discounts and benefits when completing milestones, such as placing the first order or reaching a certain spending amount, usually gives a good result. An example of success is Victoria’s Secret’s Pink Nation program. It is a system that provides specific benefits to its members, such as exclusive content and early access to sales.
- Increase the average value of purchases
It’s about incentivizing customers to spend more by offering free shipping or gifts when they reach a certain order amount. Also, you can group related products and offer discounts. For service businesses, such as SaaS, temporary updates can be effective, giving customers the opportunity to explore advanced features.
- Launch post-purchase email marketing campaigns
In this case, the approach is based on offering coupons or discounts in order confirmation emails with the aim of stimulating future purchases. These types of emails can achieve high open rates, guaranteeing volume and chances of success. Another variant is to send emails requesting reviews, encouraging customers to make new purchases.
- Incorporate product recommendations
Recommendations, as we can guess, are key to influencing purchase decisions. We can take advantage of opportunities such as using algorithms like Amazon’s to suggest products based on previous purchases and browsing behavior. Recommendations increase the probability of purchase, contributing significantly to CLV.
- Create personalized experiences
Personalization, as in so many other situations, is key to retaining customers. Segment customers based on demographic variables, interests and purchasing behaviors. Offering tailored content recommendations and personalized experiences can help increase relevance.
- Offer high-quality customer service
Good customer service is vital for retention. Therefore, the ideal is to expand communication channels and adapt touch points according to customer preferences. Companies that develop strong omnichannel interaction retain a high number of buyers.
- Create unified customer experiences
It’s about optimizing experiences at different touchpoints. To do this, technologies such as augmented reality can be used to improve the shopping experience. Facilitating the consumer’s transition between online and offline channels is an effective action.
- Facilitate returns
Simplifying the returns process is essential to motivate customers to try the purchase again. Fast, simple and, if possible, free returns help to significantly increase customer satisfaction.
- Implement survey systems
Finally, it is necessary to try to understand customers through surveys that allow us to offer actionable information. Everything adds up and, in this case, we can gain very valuable information for our improvement process.