You and your team spend day and night designing a product or service and then you finally deploy it into the market. This is a big investment from you because the business is only starting out now and the whole company is riding on it. But how do you know if it will be a hit in the market or a flop? And how do you know how much your customers will love the product?
The customer lifetime value helps you calculate all of that. It tells you about how much your customers like your product, what areas might need a little improvement and what you need to do again and again because the customers love it so much. Lifetime value is basically the money you will be getting during the whole time a customer buys the product or service from you.
This is a very important metric for every business no matter how big or small. Let’s find out why that is and how you can also calculate these returns.
Understanding Customer Lifetime Value
Here’s an easy analogy to help you understand:
Imagine you own a bakery. CLV is like figuring out how much each of your customers is worth over the entire time they keep buying from you. It’s not just about one muffin sale; it’s about all the muffins they’ll buy from you over the long haul.
Now, let’s talk about the three things that make up CLV:
- Average Purchase Value: This is like saying, “On average, each time a customer buys something from my bakery, they spend this much.” So, if a regular customer buys a coffee and a muffin every time, the average purchase value is the total money they spend on those goodies.
- Average Purchase Frequency: This one’s about how often your regulars visit. If they pop by every morning for their favorite treats, that’s a high frequency. More visits mean more chances for them to spend money at your bakery.
- Customer Lifespan: How long does the customer stick around? If they’ve been coming to your bakery for years, that’s a good, long lifespan. The longer they stay, the more muffins and coffee they’ll buy from you.
Why CLV Matters
It’s totally normal to think about how CLV can even help your business. What does it matter how much people are interested in buying your products and how much money they bring in? Well, this is one of those key metrics that can tell you a whole lot of important things that’ll help you run the business. Want to know how?
Here are some things that CLV can help with:
Find Out Where the Money Really Is
Imagine you run a small bakery shop in a neighborhood, and you want to make sure every dollar you spend on marketing brings in the best results. Well, the ‘best customers’ are like the VIPs of your bakery world. They could be the regulars who always grab a coffee and a pastry, or those who not only love your treats but also stick around for years. These VIPs are what we call high-value customers. They’re the ones who bring in not just a one-time sale but keep the cash register ringing over a long time.
So, how do you figure out who these high-value customers are? That’s where Customer Lifetime Value (CLV) comes into play. It’s like a magic formula that calculates how much a customer is worth to your bakery over their entire relationship with you. If someone spends a lot each time they visit, comes in often, and stays loyal for a long time – boom, they’re a high-value customer. By ranking customers based on their CLV, you can spot those VIPs and change your bakery’s efforts to keep them happy and coming back.
Think of it like this: instead of throwing a wide net hoping for any customer to come in and buy your product, you’re aiming for the ones who really like your baked goods and they keep coming back for more.
Increase Revenue using CLV
CLV can pump up your revenue. Here’s how it works: the longer a customer sticks around, and the more goodies they buy during that time, the more money your bakery pockets. It’s a simple equation – a longer customer lifecycle and higher customer value equal more cash in the till.
Now, the real magic begins when you start tracking and improving CLV. It’s like having a radar that helps you pinpoint those superstar customers who bring in the most revenue. Once you know who they are, you make efforts so they buy your product again and again. You can even make special offers for them that they simply can’t resist.
If you know some customers love your croissants, you can introduce them to your new gourmet coffee. You want to find different ways for them to stick around and try new offerings without being too pushy, cause that will scare them away.
How Much to Invest in New Customers?
Now this one might be a little tricky to understand.
Just consider that you have an online subscription service. You spend money on ads, promotions, and other efforts to get people to subscribe. That spending is your Customer Acquisition Cost (CAC), like the cost of getting ingredients for your subscription box.
Now, here’s the cool part: Customer Lifetime Value (CLV) is like knowing how much each subscriber is worth over time. It’s not just about the initial subscription fee; it’s about all the subscriptions they’ll get over the years. Think of it as understanding the long-term value of a subscriber, like knowing the total revenue your subscription service will make from one person.
Let’s say a subscriber stays with you for 8 years, getting 15 subscription boxes each year. If the total profit you make from them over those years is way more than what you spent to get them in the first place (CAC), you’re on the right track. It’s like saying, “I spent a bit to bring them in, but look at all the subscriptions and value they’re bringing over time – totally worth the initial investment!”
So, businesses use these numbers to make sure they’re spending wisely on getting customers and, in the long run, making more from each customer than they invested in getting them.
Make Repeat Customers
When customers become more than just one-time buyers and instead turn into loyal fans, just know that your business is booming.
Here’s the deal: those customers with a high CLV, meaning they stick around, purchase your products a lot, and become a part of your business journey, are your loyal gems. They’re not just contributing revenue; they’re giving insights on your services as well. The longer they stay, the more they understand your business, and the more they want to see you succeed as well.
But the magic doesn’t stop there. High CLV customers often become your best cheerleaders. They’re so happy with your products or services that they can’t help but spread the word to their friends, family, and even strangers. Now, why does this matter for your brand? Because word-of-mouth referrals are pure gold for any business. They boost your brand reputation and bring in new customers who are more likely to stick around and become loyal themselves.
How to Make Your Services Better?
Making a product or giving a service is not a one-time thing where you just set it and forget it. You have to keep making changes to it so it stays relevant and people love it no matter how much times change. So if you’re a brand that sells clothing then considering how much the world has focused now on body positivity, you have to change your clothing sizing to welcome plus size customers too. If you don’t do that then you won’t be relevant.
CLV can be like having a special tool that helps you make your products and services even better. It’s not just about how much money customers spend; it’s about what they really love about what you offer.
When you look at CLV trends, it’s like reading a story about what makes your customers happy or maybe what they wish could be better. You have a guide that points you to areas where you can make things even more awesome. Do they love a particular feature? Great! Can something be smoother? Let’s work on it!
By paying attention to CLV, you’re not just fixing things; you’re making your products or services stand out. It’s about giving customers exactly what they want, which not only keeps them happy but also makes them stick around.
How to Calculate Customer Lifetime Value
So now you realize how important this small metric is, you definitely want to calcuate and find out the value for your product, right? Well, follow these steps:
Step 1: Pick a Time Frame
– First, decide how many years you want to look at. It could be one year, two years, or more – whatever makes sense for your business.
Step 2: Choose the Right Formula
– Different businesses use different formulas based on how they operate. If you sell subscriptions, there’s a formula for that. If you run an online store, there’s another one. Pick the formula that fits your business.
Step 3: Gather Some Numbers
– You need a few key things:
– How much, on average, a customer spends in one go (Average Purchase Value).
Average Purchase Value = Total Revenue Earned / Total Number of Transactions
– How often they buy stuff (Average Purchase Frequency).
Average Purchase Value = Total Revenue Earned / Total Number of Transactions
Customer Value = Average Purchase Value x Average Purchase Frequency Rate
– How long they usually stick around (Customer Lifespan).
Step 4: Crunch Some Numbers
– Multiply how much a customer spends in one go by how often they buy stuff – that gives you the money they bring in. Then, multiply that by how long they stick around – that’s your CLV.
Step 5: Subtract Costs
– Take away any costs – like marketing or support costs – to get a clearer picture.
Step 6: Boom, You Got Your CLV
– The final number is your Customer Lifetime Value. It’s like estimating how much profit, on average, one customer brings to your business over the chosen time frame.
Formula for Customer Lifetime Value:
CLV= (Average Purchase Value × Average Purchase Frequency × CustomerLifespan) − CustomerAcquisitionCost
Calculating CLV in Different Industries
E-commerce
Let’s say you run an online clothing store. The Average Purchase Value is $50, customers buy once a month on average, and they stick around for about 2 years. Your Customer Acquisition Cost (CAC) is $30 per customer.
Calculation:
[CLV = (Average Purchase Value * Average Purchase Frequency * Customer Lifespan) – CAC]
[ CLV = (50 \times 1 \times 24) – 30 = $1170 – 30 = $1140]
E-commerce businesses need to factor in the cost of returned items, shipping expenses, and maybe even the seasonality of sales. Understanding the impact of discounts, promotions, and repeat purchases is crucial for an accurate CLV.
Subscription-Based Models
– Imagine you have a streaming service. Subscribers pay $10 a month, on average, and stick around for 3 years. Your CAC is $50.
Calculation:
[ CLV = (Average Purchase Value * Average Purchase Frequency * Customer Lifespan) – CAC]
[ CLV = (10 \times 1 \times 36) – 50 = $360 – 50 = $310]
For subscription models, it’s crucial to consider factors like churn rate (how many subscribers you lose over time) and the discount rate (the time value of money). The longer subscribers stay and the less likely they are to cancel, the higher the CLV.
True, Tried and Tested Ways to Increase Customer Lifetime Value
Did you finally calculate the Customer Lifetime Value of your product and it didn’t really come out good? Don’t worry, here are some strategies to help you improve this:
Start Off Strong
When onboarding new customers, you need to make an impression that lasts forever. The customer onboarding process, happening in the first few days after purchase, is your chance to go all out and shine. It’s like saying, “Hey, here’s what we’re all about, and we’re thrilled you’re here!” By sending welcome emails, helpful follow-ups, and making sure customers feel connected, you’re setting up a relationship. Don’t think of it as just making a sale and be done with it. And guess what? A smooth onboarding process means your customers will give back more to your business over time – that’s your CLV.
Think of it as making sure your friends not only stick around but also enjoy the time spent with you. Here’s the secret: it costs way less to keep existing customers happy than to find new ones. That’s why taking a close look at customer retention and putting effort into customer success is like hitting the jackpot.
Make Your Orders Valuable
Have you ever shopped online on a website and on checkout found out that they are giving you s discount for being a new customer? Surprises like these are always good and they make us come back to the website. One powerful way to do that is by adding extra value to each order.
Consider things like throwing in a free gift – who doesn’t love anything for free? Or suggest other items they might like (it’s called cross-selling) to enhance their purchase. Think about spicing up your packaging and branding to make the whole experience feel special. You can even offer discounts if they bundle items together. It’s like saying, “We appreciate you, and here’s a little something extra because you chose us.”
These thoughtful touches not only make each order more exciting but also create a connection that goes beyond the product.
Build a Longer Relationship
It takes a lot of time, attention, and dedication to build a strong relationship ith your customers, but in the end, it all becomes worth it because you see the revenue rolling in. Many businesses make the mistake of slowing down after the first purchase, but the real magic happens when you keep the connection alive. It’s not just about selling a product; it’s about saying, “Hey, you’re important to us, and we value your choice.”
Stay in touch with your customers, maybe through social media or regular emails. It’s like sending a friendly wave and saying, “We’re still here for you.” By doing this, you’re not just selling; you’re building a bond.
And guess what? This bond helps to improve your CLV because the longer customers stick around, the more value they bring to your business over time.
Listen to What the Customers Are Saying
When customers start to leave or choose a competitor, it’s like a signal to understand what went wrong. So, the best move is to hear it directly from them.
Think of it as sitting down with a friend who’s feeling a bit off and asking, “Hey, what’s going on?” Provide opportunities for customers to share their thoughts through surveys or polls. It’s like saying, “We genuinely want to know how we can make things better for you.”
This feedback can help you figure out where you’re going wrong and what changes you can make in your services. Listening to this feedback also helps the customers know that you are hearing their problems and working on the solution.
