Customer lifetime value (CLV or LTV for lifetime value) is arguably the most important piece of information for a business. It tells you how your brand resonates with your audience, how much your customers actually like your product or service, as well as how you can improve and grow your business.
Customer lifetime value is a metric that tells businesses how much revenue they can realistically expect from a single customer.
However, the CLV figure doesn’t just calculate what the customer spends, but it also considers how much the company spent on the customer, as well as how much the customer may spend in the future.
In other words, your customers are worth more than the amount that they spend on your services and products. They have future, prospective value that can grow exponentially as they became volunteer brand ambassadors.
How to calculate customer lifetime value
There are several different methods that can be used to calculate the customer lifetime value, as the value itself can be historical or predictive.
For example, you may want to calculate the value based on the actual purchases that the customers made or based on expected future purchases.
Additionally, the method can depend on the type of your business. It’s easier to calculate the predictive customer lifetime value if your business runs on a subscription model than if it operates as an eCommerce front, for instance.
To make things more understandable, we will use the historical value, which can be extrapolated to future purchases. While it may not be 100% correct, it still represents an excellent estimate that can be used to determine the value of each customer and the business in general.
The customer lifetime value can be calculated with a number of different equations, but it’s recommended to simply find the average purchase value, and then multiply that number by the average purchase frequency. After that, you will need to calculate the average customer lifespan, which you will use to multiply with the customer value to determine the customer lifetime value.
In simpler terms, customer lifetime value is equal to the product of average purchase value, average purchase frequency and average customer lifespan,
or CLV = APV x APF x ACL.
The way you calculate customer lifetime value can also vary based on your business model. For instance, it’s easier to calculate CLV if you have a subscription model than if you’re in e-commerce. That’s because sales become more predictive.
Why is customer lifetime value important
As we mentioned earlier, customer lifetime value is an essential metric for all business. Here, we will explain why it is important and how it can affect businesses.
Every decision that you make for your business will affect your customers and their conception of your product or service. Naturally, all business owners want to focus on making their customers happy and loyal, because satisfied customers generate the most revenue.
In fact, it’s estimated that 80% of sales come from just 20% of customers.
This means you want to focus your efforts on keeping the most profitable customers happy and loyal, even if it means losing other clients. It’s important to understand that unhappy and high maintenance customers may sometimes not be worth the effort.
However, this doesn’t mean that you can just forget about all customers except the ones that generate the most revenue. Far from it.
You need to collect in-depth information about all customers to make data-driven decisions about your business and its marketing efforts. Ideally, you want to have the entire purchase history and customer behavior at your fingerprints, before you make any potentially long-lasting decisions. This is the main reason why many business owners and executives are turning to specialized business software, like Simply CRM, to help them analyze their data and optimize their companies.
How to increase your customer lifetime value
Increasing your CLV can be incredibly simple or hard, depending on the specifics of your company. Sometimes, a business can improve their customer lifetime value by switching their billing cycle from monthly to yearly. In other cases, the company may need to overhaul their entire sales process and customer support.
Now, to help small business owners and entrepreneurs, we will list 5 proven strategies that you can use to increase your average CLV and generate higher revenue from existing customers.
- Improve the onboarding process
- Provide engaging content
- Build complementary services
- Offer a loyalty program
- Provide live chat support
Now, we will cover each strategy in greater detail to explain how they affect the customer lifetime value.
Improve the onboarding process
Improving the onboarding process should be at the top of priorities for all companies that want to create sustainable business growth. The onboarding process is the first impression that your customers will get of your product and service.
It’s essential that it represents a positive experience that the customer will gladly remember and retell to his friends and family. The best way to improve the onboarding process is to automate and personalize it for each customer.
You can automate the process by creating how-to guides, videos and knowledge bases that will help the customer get acquainted with your product. To further improve onboarding, you can personalize it by using the information that you gathered about your customers.
This is why CRM systems are essential for practically all businesses and companies, regardless of their specific niche. They store all valuable customer data and make it accessible non-stop, from any location.
Provide engaging content
This point elaborates on the previous one.
Your company needs to produce engaging content that doesn’t deal with your products or service. The customers need to view your business as an authority source on which they can rely for everything that is related to your particular niche.
If you run a business in the lifestyle niche, consider handing out brochures or bring attention to a specific problem that is under-represented in the community or media. For example, create infographics that educate your readers about the importance of regular activity for the overall health and well-being. Suggest a few exercises that everyone can do on their own, without any expensive products or professional training.
Build complementary services
Consider how you can expand your business to provide a better experience for your customers. If you’re collecting customer information in a CRM, analyze your customer feedback. They may have already suggested potential improvements or additional services that you can offer.
You can use complementary services to increase the customer lifetime value by selling them as separate items or offering them in bulk deals for your existing products/services.
Offer a loyalty program
Unsurprisingly, a loyal customer will spend more over the course of their lifetime than an occasional visitor. Additionally, it costs less to retain an existing customer than to create a new one. A loyal customer is already invested in the product or service, which means he is more likely to visit the business more often, spend more per visit and engage with your company.
To keep the highest-paying customers satisfied and encourage them to spend more, you can introduce a loyalty program that rewards customers with a rich purchase history.
The best way to analyze your customers’ behavior and find the best performing clients is to utilize the power of a business system, such as Simply CRM, which collects all customer data on a single platform. Your staff members can easily sift through the data to identify the most loyal customers.
Of course, this may slightly reduce your short-term revenue, but it brings higher profits in the long run.
Provide live chat support
The importance of live support can hardly be overestimated.
In the modern world, everything moves 100 miles an hour and no one has any time to waste. The longer your customers have to wait for the support team to answer, the greater the chance that they will feel undervalued. Spread over a longer period, this will cause your customers to lose trust in your company and take their business elsewhere.
Moreover, if you don’t store the communication history on a centralized platform, your support agents will not be able to provide adequate help for the customers. They may have to spend hours going over an issue that was already dealt with by another agent.
Not only is this time-consuming for both the employee and the customer, it is also incredibly frustrating. Even if the problem is successfully resolved in the end, the customer may walk away with a negative experience, making them less likely to use your products or services in the future.
Conclusion
Customer lifetime value matters. It’s arguably the single most important factor that determines the health of a business, as it directly affects the customer retention rates, reveals the brand loyalty of your business and helps you stay profitable.
While it may be costly to implement or hard to adopt, a CRM system can help you improve your customer lifetime value and turn a net loss into a profit. It does this by providing you with a powerful solution that you can use to study your customers and develop your business model around their behavior.
If you listen to your customers, they will tell you everything that you need to know to create a highly efficient and profitable business. However, as your business grows, it becomes increasingly hard to pay attention to every single customer.
Unfortunately, most small business owners would rather keep to their ways and waste years before looking for help to deal with the overwhelming amount of information that they collect. Others simply give up on collecting data altogether, essentially placing their business on its way to bankruptcy.
Only a modest number of small businesses currently uses CRMs and similar systems to improve their operations. Naturally, this number is increasing over the years, as it becomes obvious that business software platforms are directly correlated with high revenues.
If you want to optimize your business operation and improve the growth rate of your company, we highly advise you to implement a CRM or an ERP. In case you’re not ready to invest in an untested system, we invite you to try out Simply CRM for 30 days at absolutely no cost for you.