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Customer lifetime value (CLV) is a vital metric which defines the long term profitability of a business.
Alarmingly, Criteo published a study in 2018 which says that “Only 34% of marketers interviewed were aware of the importance of customer lifetime value”. Additionally, “Only 24% of the respondents were monitoring their CLV the right way.”
What is customer lifetime value?
Customer lifetime value is a key metric which shows the total revenue a brand will generate from a customer across the period of time (the lifetime) that the customer is retained by the business.
By measuring CLV in relation to customer acquisition costs (CAC), brands can measure their long term marketing return on investment (ROI) and overall profitability.
Companies can use CLV as a metric to identify high-value customer segments which are more profitable and give those customers preferential treatment to ensure that they are retained for longer.
Paul Farris, author of Marketing Metrics shares that, “The chances of selling to an existing customer are 60 – 70% higher than selling to a new customer which is only about 5-20%. This makes CLV a crucial metric because it costs less to keep existing customers than to gain new ones.
With the constant focus in by brands on customer acquisition, the demand for advertising inventory to acquire new customers has gone up. As a result, many industries are facing an increase in CAC which is unsustainable. To solve this challenge, increasing customer lifetime value is the best path to grow profitability.
Customer experience and support teams play an important role in keeping customers happy by making sure that they solve customer’s problems quickly – which has a direct impact on customer retention and CLV.
The importance of customer lifetime value
When a brand knows it’s customer lifetime value, it can create specific initiatives to increase it.
Smart companies launch programmes which are specifically designed to increase customer lifetime value – which they do by engaging customers with personalised offers, promotions, cross-sells and upsells via social media, email marketing, SMS and more.
Costs per order fulfilment, customer acquisition costs, conversion rates, and customer churn rates are all important but, CLV is the single metric which defines a business’s long term profitability (as long as it has a reasonable level of customer acquisition and retention!).
How to calculate customer lifetime value?
To find the customer lifetime value, brands need to know the average purchase price, the average length of time that a customer spends in the business (lifespan) and the average frequency of purchase:
CLV = (Average Purchase Value – Average Purchase Frequency) X Average Customer Lifespan
To find the average purchase value (also known as average order value), the brand can divide the total revenue of the customer’s lifespan by the number of purchases.
Average Purchase Value = Total Revenue / # of Purchases
10 strategies to maximise customer lifetime value
- Communicate better with customers – Brands who make their customers feel special and provide tailored offers, promotions and product recommendations encourage customer loyalty.
- Go above and beyond – One way to nurture existing customers is to make sure that the customer feels that they are important. Improving customer relationships – not just through selling but connecting on a personal level – will always have a positive result. This can be done via customer support, CRM or in person in-store.
- Create a loyalty program – A report by Michael McCall (Director of The School of Hospitality Business) states that, “There has been a 20% increase in the number of businesses using a loyalty programme over the past decade.” Loyalty programmes are an effective tool to increase CLV because they reward customers for staying faithful to a certain brand. With a loyalty program, brands will also be able to collect highly valuable data about their customers which they can use to provide tailored offers and optimise their offering.
- Upselling and cross-selling – Cross-selling and up-selling can add value to the customer’s experience. These are also the fastest and easiest way to increase CLV. Airlines are masterful in the art of up-selling and cross-selling as they allow upgraded seats and add-on services throughout their passengers’ journeys.
- Level up the customer service – As mentioned above, customer service has a direct influence on CLV.
- Personalisation – Personalised content and offers are important in improving customer lifetime value. Personalised content on websites, email marketing, landing pages and on social media helps customers feel valued – which creates a loyal bond and (you guessed it) improves retention and CLV.
- Exclusivity – Customers feel special when they are given exclusive offers. These exclusive offers can be given to the most loyal (highest value) customers. For example, a frequent shopper programme may have a tiered loyalty programme which gives more rewards and perks to customers who shop more frequently.
- Harness the power of social media – When a customer buys from a brand, the brand can retarget them with relevant ads on social media in order to increase CLV.
- Learn how to discount wisely – Discounts and special offers are one of the best ways to improve CLV. However, these should not be offered indiscriminately as there is a danger of cannibalising profit. If a high spending customer is given 50% off of a product that they were prepared to buy at the full price, the business has lost an opportunity. Learning how to strategically apply discounts and special offers will boost loyalty, engage customers and improve CLV all at the same time.
- Be more convenient – Brands should make shopping from them easy and convenient. Customers love to stay with businesses which allow them to shop seamlessly.
Track CLV through Google Analytics or Shopify
Google Analytics has a reporting tool called “Lifetime Value” which brands can tap into to get a general idea of their customer’s lifetime value.
Brands can use the metrics generated from the Lifetime Value report from Google Analytics to know more about customer behaviour. Under the Lifetime Value report, brands can also pick out other measurable data like goal completion, revenue, page views, sessions and transactions.
For brands who are running under Shopify, there is also the option to see the purchase history of their customers. On the reports tab, brands can generate a report “Sales by customer name” which will show who is generating the highest number of sales for the brand.
Through Shopify, it is also possible to analyse customer behaviour and there are a lot of different interactions which are tracked that can be measured and optimised for.
Improving customer lifetime value is dependent on the brand’s ability to develop short term tactics and long term strategies which will keep customers loyal. If a brand wants to improve the CLV, they will have to do more than just sell their products. They need to develop brand ambassadors who are extremely loyal to them. This means making an effort to keep customers interested and engaged throughout the relationship.