Customer Lifetime Value

What is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV) is a business metric which indicates the amount of revenue a business can expect from an individual customer over the entire course of their business relationship.

This metric measures the value of an existing customer against their forecasted time period as a customer. This is determined by the basic principle that the longer a customer continues purchasing from a company, the higher their overall lifetime value becomes. The lifetime value of a customer will vary depending on the industry in question but for the majority of companies it serves as a strong basis for increasing revenue over time.

How to Calculate Customer Lifetime Value

The customer lifetime value formula is calculated through the multiplication of relevant metrics. Firstly, the Customer Value for an individual is found by multiplying their Average Purchase Value by their Average Number of Purchases.

Then, the Average Customer Lifespan is calculated by dividing the overall average tenure of customers by the total existing customer base. To determine the CLV of a customer, their Customer Value is multiplied by the Average Customer Lifespan.

In short, Customer Lifetime Value = Customer Value X Average Customer Lifespan.

Customer Lifetime Value use cases

CLV is a keystone metric which provides companies with greatly increased revenue forecasting ability and extensive insight into their customers. There’s a plethora of strategical advantages offered through the accurate measurement of Customer Lifetime Value. Some key benefits include:

Increased Revenue

Improving customer experience processes to extend Customer Lifetime Value increases revenue over time.

Greater Loyalty and Retention

Conducting regular CLV measurement helps companies to identify customer issues and preferences. These can be resolved and emphasised to increase retention and loyalty.

Increased Targeting Accuracy

Accurate CLV measurement serves to increase the customer targeting accuracy of a company by allowing them to segment their customers. This facilitates the targeting of customers based upon their expected profitability, needs, preferences, or behaviour.

Lower Acquisition Costs

Customer acquisition costs significantly more than retention. Extending and increasing Customer Lifetime Value mitigates the volume of new customers required, therefore reducing marketing and sales expenses.

Simplified Financial Forecasting

Measuring CLV gives companies a deeper understanding of their value as well as their behaviours. This enables more accurate future cash flow predictions and revenue forecasting, providing greater overall accuracy for financial planning.

Improved Offering

Utilising Customer Lifetime Value not only helps companies understand the value of their customers, but also provides insight into the value their customers gain from their product or service. This creates an opportunity to improve products/services to increase customer satisfaction and loyalty.

Best Practice: How to Increase Customer Lifetime Value (CLV)

For most companies, the abundant benefits provided merit the investment of time and resources into measuring Customer Lifetime Value. Below are some best practices on how to increase CLV.

Utilise the Onboarding Process

First impressions last. Designing and refining a comprehensive but streamlined onboarding process is one of the initial steps to increase overall Customer Lifetime Value.

Use customer data to create personalised onboarding workflows, providing an enhanced custom experience which expedites the onboarding process. Build a knowledge base and live chat function to further simplify the process and ensure customers can always find support.

Request feedback from customers after onboarding to gain valuable insights and identify areas for improvement. Furthermore, analyse service KPIs such as retention rate, customer activation rate, time to first interaction and repeat purchase rate to further optimise the onboarding process and increase CLV.

Identify and Target Customer Profiles

Conduct internal Customer Lifetime Value measurement to identify optimal customer profiles and their common traits. Profiles can be compared to determine the most discernible differences between high and low value customers. This facilitates the identification of common traits and preferences to emphasise when targeting potential customers in the future.

Identifying and analysing relevant traits amongst customer profiles provides greater targeting accuracy which has a direct impact on increasing CLV.

Build and Nurture Long Term Relationships

Using CLV to identify ideal customer profiles is effective practice. However, acquiring new customers is considerably more expensive than retaining existing ones. Conservative estimates state that new customer acquisition is at least five times more expensive than retention.

Prioritise relations from first contact with potential customers to build a foundation for developing positive long-term relationships.

Establish post sale engagement touchpoints to check in with and nurture customers. Ensure that company representatives are trained to engage in interactions with the customers’ point of view in mind to demonstrate understanding and care.

Developing strong positive relationships with customers and making them feel understood means that subsequent cross-selling, upselling and renewal efforts are more likely to be perceived as high-quality service rather than just attempts to sell.

Improve Customer Service

Customers have a much greater likelihood of repeat purchasing when they experience excellent customer service. There are several steps that can be taken to improve and refine customer service.

Customers expect to be able to find support through a variety of different channels. It’s essential to ensure omnichannel support through multiple channels such as email, live chat, phone, and social media in order to build long term customer relationships.

It’s equally important to make sure that those operating these channels are adequately trained to do so. Provide comprehensive customer service training to employees and equip them with the necessary skills to provide great experiences for their customers. Training should focus on empathy, active listening and the ability to communicate clearly.

It’s not possible to create unparalleled customer service without listening to customers. Create feedback systems and ensure they’re reviewed regularly to identify emerging trends or issues. Use customer insights to personalise their experience and show customised offers, recommendations, and product/service suggestions.

Great customer service makes customers feel valued. A valued customer in turn provides more value to the business, and does so over a longer period of time.