Your Complete Guide to Customer Lifetime Value (CLV)
Take a moment to think about your favorite t-shirt. You know the one we’re talking about. It’s soft, slightly worn in, and goes with everything.
Now, try to remember how tough it was to find that shirt. The Perfect T-Shirt is a mythical wardrobe item with a horn growing out of its forehead, and nearly impossible to hunt down and trap.
But what do t-shirts have to do with marketing? A lot, actually. Just like it’s simpler to slip into your 10-year-old tee than to shop for a new one, selling to existing customers is much easier than attracting new ones. And with the cost of acquiring new customers being five to seven times higher than retaining current ones, it’s also more cost-effective for your business.
Maximizing customer lifetime value (CLV) is a surefire way to trim your bottom line, increase customer retention, and drive revenue.
Ready to learn more? Change into that comfy t-shirt and grab some wine. We’re about to teach you how to boost your profits!
What is Customer Lifetime Value (CLV)?
Customer lifetime value measures the total income your business can earn from an average customer. Simply put, it reveals what a typical customer is worth to your company.
Unfortunately, much like buying great t-shirts, measuring a customer’s lifetime value is a lot harder than it looks.
To calculate CLV, you first have to:
- Determine the value of your average sale
- Calculate the average number of transactions per period (this can be weekly, monthly, or quarterly)
- Measure how long the average customer sticks with your brand
After you have those inputs, multiply the three numbers to calculate CLV.
The customer lifetime value formula looks like this:
CLV = Average Transaction Size x Number of Transactions x Retention Time
Say for instance you own a café. The price for a latte is $3. Carol the customer visits your coffee shop three times a week, 50 weeks a year, for two years. The CLV formula would look like:
CLV = $3 (average sale) x 150 (annual visits) x 2 (years) = $900
Identifying this metric and understanding how to increase customer lifetime value can reduce churn, improve forecasting, lower customer acquisition costs, and drive profits.
Yep, we know. You’re a marketer, not a mathematician. And a CLV formula is basically math but with words. Luckily, you can use plenty of tools to skip the grunt work and quickly calculate CLV. Here’s a free CLV calculator we love using.
Why CLV Matters for Revenue Growth
There is an intrinsic link between CLV and your business’s profitability. It reveals the revenue value of every customer over time. The longer a customer’s lifecycle or the higher their value is, the more revenue they bring to your company.
Using this data, you can pinpoint the customer segmentation that earns your company the most money. This helps you tailor your marketing content to your most profitable customers, helping to retain them for longer. By retaining more customers, your company can cut back on its acquisition costs.
Additionally, CLV helps you identify issues that may impact customer retention or loyalty. And you already know that you’ll repeat what you don’t repair. Uncovering potential problems allows you to fix what’s broken and stop churn in its tracks.
Factors That Influence CLV
No two customers or CLVs are the same. Many different factors can influence customer lifetime value, including:
- Customer acquisition costs (CAC), or the amount you spend to acquire the customer
- How loyal a customer is to your business
- How good you are at cross-selling or upselling your products or services to the customer
- If the customer found your brand through a referral or recommendation from someone they trust
While you can’t control customers, you can improve your marketing, sales, and customer support strategies to ensure clients stick around for the long haul.
Simple Strategies to Improve CLV
Use these simple strategies to improve CLV and customer retention.
- Leverage customer segmentation and data to create hyper-personalized campaigns for your VIP customers.
- Make repeat customers feel special with loyalty rewards and programs.
- Upsell customers upgraded packages or offer personalized product recommendations based on their unique wants and needs.
- Provide swift, stellar support to ALL customers, not just your most profitable.
Common CLV Challenges and Pitfalls to Avoid
Your favorite t-shirt is almost perfect. ALMOST. It has a few loose threads, a barely visible wine stain on the bottom, and plenty of dog hair. Similarly, customer lifetime values are not without their pitfalls. Some of the most common CLV challenges include:
- Poor customer experience (CX)
- Disengaged customers
- Customers overlook the value of your products or services
- You skimp on customer feedback implementations
Luckily, most of these are easy fixes. You must, must, MUST keep your customers engaged with personalized, valuable content. Create content that educates, entertains, and excites customers based on their specific pain points and preferences. It’s like washing your beloved tee in bleach-free detergent to minimize fading.
Stop Shopping for New Shirts and Customers
Determining CLV helps you identify your most valuable customers and develop better retention strategies. This lowers acquisition costs while driving profits.
Ultimately, it’s all about treating those VIP customers like you would your favorite shirt: with personalized TLC.