Customer Lifetime Value: What it is and How to Measure it

by Burke Dorman
3 mins read
Business people running towards target

One thing’s for sure: You need to spend money to make money. That being said, dropping large amounts of cash just to secure customers can feel risky. So, how can you be sure that your investment is worth it? 

Many business owners choose to calculate the value of their marketing initiatives by looking at their short-term wins. While focusing on initial sales can be helpful, the relationship you have with your customers goes far beyond their first purchase. 

Business owners should be directing their sales and marketing strategies toward securing repeat customers. People who have purchased from you before typically spend up to 300% more on your products or services than new customers. They can even generate up to 40 percent of your total revenue. 

Calculating Customer Lifetime Value (CLV)

If you’re still skeptical, you don’t have to take our word for it; by calculating the CLV of your business, you can determine exactly how much profit a single customer can bring to your business over a long period of time.

Most businesses try to determine how they can maximize the number of customers they bring in while minimizing cost. People who understand the significance of calculating CLV will instead look at the maximum value that they can bring in.

All customers aren’t created equal; some bring in more revenue to your business than others. Therefore, understanding who is more likely to stick with your services helps you to properly tailor your marketing methods. You’ll also be able to budget more effectively when designing your customer loyalty and retention strategies.

How to Calculate Customer Lifetime Value (CLV)

When you neglect to factor CLV into your calculations for ROI, you might think that your ad spend dollars are going nowhere. For example, if you’re offering $15 haircuts, spending $6 on an advertisement can seem hefty when you take your other expenses into account. 

However, the value of that ad spend changes when you consider that 65 percent of your customers return every four weeks for another haircut and stick with you for at least one year. So, instead of spending $6 for a conversion that generates $15 worth of revenue, you’re spending $6 to gain a customer lifetime revenue of $180. 

In other words, you want more than a one-night stand from your customers, and to achieve this, you have to look beyond the first conversion when calculating the results of your ad spend. To do this, you’ll need to know the following variables:

Converted Clicks: How many people who clicked on your ad made a purchase?

Average Revenue Per Purchase: Add together the total purchase price of each ticket/total customers

Percentage of Repeat Customers: (Repeat customers x 100)/total customers

Average Purchases Per Year: Add together the total number of purchases per customer per year/total number of customers who made purchases that year

Average Number of Loyal Customer Years

Profit Margin: (Revenue – cost of goods sold)/revenue

Using a customer lifetime value formula involves multiplying all of the above calculations and then subtracting your Adwords spend amount (or the total dollar amount spent on the marketing campaign that included the converted clicks).

Put more simply, this is what your CLV formula should look like: 

Converted Clicks X Average Revenue Per Purchase X Percentage of Customers Who Purchase Again X Average Purchases Per Year X Average Number of Years They Will be a Customer X Profit Margin Adwords Spend = Customer Lifetime Profit

5 Ways to Increase CLV

Many small business owners make the mistake of trying to minimize their advertising budget despite the fact that this neither attracts new clients nor maintains the ones they already have. Instead, they should be focusing on increasing their CLV. Here are five of the best strategies for increasing your customer lifetime value:

1. Enhance Your Onboarding Procedure

First thing’s first: If your onboarding process isn’t simple, personalized and strategic, your customers likely won’t come back for more. 

Your customers want to know what’s in it for them; they probably made a purchase from you because they were initially swayed by your customer value proposition. Once you’ve converted them, continue to identify and assist them with their goals immediately.

Be sure to communicate the value of your service or offerings and keep your customers engaged with videos, tutorials and guides. Keep your content manageable, and touch base with your new clients frequently so that they feel nurtured and involved.

2. Segment Your Lists

You can broadcast as much content as you want, but your messages will go over your customers’ heads if they’re not relevant or appealing to them. Segment your lists so that you’re able to personalize the customer experience based on demographics, interests or previous purchases. Doing this will also give you access to more effective analytics. When you understand which customer profiles are more likely to stay loyal, you’ll boost your CLV.

3. Improve Your Customer Service

A stellar product doesn’t stand on its own without exceptional customer service, and one simple slip-up can send your customers over to your competitors. When customers experience poor customer service and don’t feel as though they are being properly attended to, they’re more likely to give negative reviews than positive ones, and take their business elsewhere. 

However, if you go above and beyond with your customer service efforts, your clients are sure to tell their friends about you and keep returning simply because they’re being treated so well.

The customer always comes first, but you’ll need to get some feedback in order to learn how you’re performing. Reach out periodically to your customers to hear about their customer experience; if something isn’t working for the majority of your audience, change it. Let them know that you’re willing to listen to them and tailor their experience to meet their personal requests.

4. Reward Customer Loyalty

Positively rewarding desired actions is a proven way to get people to repeat their behaviors and improve your customer retention rates. Therefore, if you want your customers to remain loyal to you, offering incentives that interest them will help. Rewards programs can work well, but they’re not the only option for achieving this goal.

Celebrate your customers by adding value and personalizing their experience. Some ideas include:

  • Sending out customized birthday emails with exclusive promo codes
  • Offering discounts for VIPs who sign up for a segmented list
  • Giving out bonuses for referralsSurprising valued customers with discounts, freebies and other desirable offers

Make your customers feel special and they’ll keep coming back!

5. Generate Recurring Revenue

It’s no wonder why subscription services are becoming so trendy; as a long-term service that is bringing in loyal customers and a regular revenue stream, they’re a great way to improve CLV. With every product or service you promote, consider how the customer will benefit from purchasing it regularly. Then, create a service that makes life more convenient for them by automating the offering.

They’ll get what they want without having to ask for, and you’ll keep charging their credit card. If you set up your subscription model properly, you’ll have something for everyone. 

Offer various packages at different price points; allow people to sign up for a free trial of the premium service; give discounts to people who pay for a year up front — these are all great ways to get you thinking about your long-term goals and revenue.

While it’s exciting to make a sale, the magic isn’t in the conversion. Retaining customers is the key to maximizing your digital marketing budget and increasing profits. Create relationships with your customers, use data effectively and focus on improving the client experience. 

You’re already analyzing your ad spend; why not keep track of your CLV metrics and watch your profits soar.

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