What is CLV. Customer lifetime value
It is a fundamental KPI in any digital marketing strategy.
When analyzing Customer Lifetime Value (CLV) in relation to Customer Acquisition Cost (CAC), you can obtain results that allow you to calculate how long it takes to recover the investment required to acquire a new customer, regardless of which stage of the conversion funnel they are in.
This helps optimize marketing and sales budgets.
Let’s look at an example.
The Customer Lifetime Value (CLV) of a Honda owner could be up to $100,000 if they are satisfied with their choice of car or minivan and end up buying several over the years. Alternatively, the CLV of a regular coffee drinker could be even higher, depending on how many cups of coffee they consume daily and where they purchase it. On the contrary, someone who buys a house twice in their lifetime may be worth only, let’s say, $15,000 to a real estate agent, because while the purchase value is significant, the percentage paid to an agent is only a fraction of the total.
In the bigger picture, Customer Lifetime Value is an indicator of the profit associated with a particular customer relationship, which should guide how much you are willing to invest in maintaining that relationship. In other words, if you estimate a customer’s CLV to be $500, you wouldn’t spend more than that to try to maintain the relationship. It simply wouldn’t be profitable for you.
Understanding your CLV well can help shape your business strategy to retain loyal customers, rather than investing resources in acquiring new ones. Of course, both new and existing customers play a significant role in building the overall business.
¿Why is it important to know the lifetime value?
Knowing the lifetime value of a customer will tell you how much individual commercial value they bring, determining whether your relationship with customers is truly profitable.
By understanding this KPI, you and your team can make informed decisions about how much money you can spend on attracting, acquiring, and retaining customers while remaining profitable.
Some advantages of knowing your company’s lifetime value include:
- You can prioritize customer profitability time and apply defined strategies.
- Calculating the LTV for each acquisition channel will shed light on how to get more ROI from paid channels.
- If you have multiple products, you can make this same calculation for each one and promote the most profitable offer for your business.
- You can prioritize segmentation, retention, and monetization to enhance future customer profitability.
This is just one more indicator in a puzzle of KPIs that you can establish for your digital marketing strategy. If you want to learn more about how they work and how they combine with other KPIs, we recommend you check out this practical guide that will provide you with even more tools to analyze what your organization really needs to optimize the conversion funnel process.
¿How to Calculate Customer Lifetime Value?
To calculate the lifetime value, you can start with these steps:
- Calculate the average purchase value: This figure is obtained by dividing the total company revenue in a specified period (e.g., one year) by the number of purchases during that period.
- Calculate the average purchase frequency rate: By dividing the number of purchases by the number of unique customers who made purchases during the same period.
- Calculate the customer value: When you multiply the average purchase value by the average purchase frequency rate.
- Calculate the average customer lifespan: This is determined by the average number of years customers continue to make purchases from the company.
- Calculate CLV (customer lifetime value): Multiply the customer value by the average customer lifespan, resulting in the average income per customer over the course of the business relationship.
The CLV or LTV indicator provides information about the total revenue a company can expect from a single customer throughout the business relationship.
When customers make recurring purchases, the lifetime value increases, helping identify customer segments that are of higher value to the company.
Always keep in mind that the Customer Acquisition Cost (CAC) should be lower than the lifetime value indicator because the cost of acquiring a new customer should be less than what we ultimately gain from them.
The Value of Knowing Your CLV
Calculating the CLV (Customer Lifetime Value) for different customers serves various purposes, primarily in making business decisions. By knowing your CLV, you can determine, among other things:
- How much you can spend to acquire a similar customer and still maintain a profitable relationship.
- The exact amount you can expect an average customer to spend over time.
- What types of products high CLV customers prefer.
- Which products are the most profitable.
- Which customer relationships are driving most of your sales.
- Who the most profitable customer types are.
Using your CLV as a foundation, you can work towards gaining a better understanding of your most loyal customers. What do they like? Why do they continue to buy from you?
Together, these kinds of decisions can significantly boost your business’s profitability.
As with any metric tracked in business, knowing the number alone is not enough. You must use your CLV to shape your overall business strategy. If the customer lifetime value is increasing, it could mean you should continue investing in product development or customer success teams. If your CLV is decreasing, it could indicate that your most recent marketing strategy needs a reset. One of the key benefits of understanding CLV is that it can help you significantly reduce your customer acquisition costs over time.
Seven ways to Increase CLV
Customer Lifetime Value is all about building a lasting positive connection with your customers. Therefore, increasing your CLV figures is achieved by nurturing these customer relationships. Here are some ways to do it.
1. Invest in Customer Experience
Customer experience encompasses every interaction between a customer and a brand, including store visits, contact center inquiries, purchases, product usage, and even exposure to advertising and social media. Enhancing the experience is a company-wide effort often addressed through a customer experience management program. This involves monitoring, listening, and making changes that contribute to a lasting improvement in how customers feel and their tendency to remain loyal in the long term.
2. Ensure Your Onboarding Process Is Seamless
Customer experience begins the moment a prospective customer encounters your brand, but companies can often forget that customers need attention after the purchase. Ensure your onboarding process is optimized for your customers’ needs and is as straightforward and effortless as possible, requiring minimal effort on the customer’s part. Personalization and communication of the additional value you provide to your customers should be a priority.
3. Launch a Loyalty Program
A loyalty program incentivizes repeat business by offering discounts or benefits in return. It can take the form of a loyalty card or app, or a points system that customers accumulate with each purchase. While not a magic solution for customer retention, a well-planned and executed loyalty program can yield significant results.
4. Recognize and Reward Your Best Customers
With your customer experience management program in place, you will already have some insights into which customers are likely to have the highest CLV. You can nurture your relationships with these individuals or groups using targeted marketing and special offers that acknowledge their loyalty. This could include expedited free shipping, top-tier benefits in your loyalty program, or access to exclusive or pre-launch products and services.
5. Provide Omnichannel Support
Your customers will have a variety of preferences when it comes to interacting with you, so your support channels should reflect this. Research to discover which channels your particular customer base prefers to use, instead of offering only what you think they will want. Gather customer feedback on self-service options and frontline interactions to deliver a great customer experience with omnichannel support.
6. Harness the Power of Social Media
Social media is increasingly important not only for customer communication but also for customers to gather information about your brand and its public image. If customers feel that your responses on social media to a query or problem are not fast, comprehensive, or empathetic enough, it will impact the customer’s perception of your brand in the future. Ensure that mentions and responses on social media are included in your customer experience strategy.
7. Close the Loop with Dissatisfied Customers
Closed-loop feedback is a powerful way to reduce unwanted customer churn and turn dissatisfied customers into loyal ones. In this model, companies proactively reach out to detractors or complainants and intervene before issues can escalate and lead to a customer relationship breakdown. In many cases, this targeted effort and active listening by the company actually make the relationship stronger than it originally was. It’s a valuable extension of your customer experience management program.
Having these values that may not seem prioritized requires patience and dedication when integrating them into your business’s financial projections, but the advantages of having this information truly have a positive impact on strategy planning and can significantly increase the long-term ROI of your digital marketing investment.
Furthermore, it can help you get rid of traditional campaigns that may be ineffective and focus on nurturing relationships with your customers.
It’s not about viewing it as a tool to acquire as many customers as possible at the lowest cost but rather about valuing the quality of your customers.
As mentioned by Harvard Business Review, this indicator (among others) helps see customers as “value-creating partners” rather than targets for value extraction, as they can offer much more than one or several purchases.
They can provide you with ideas, introduce you to other leads or potential customers, be motivated to share your content, their experiences… So there are certain KPIs that you can also analyze to assess the quality of the relationship you have with your audience.
Juan Esteban Yepes