Customer lifetime value (CLV) is a key metric for businesses that measures the total value a customer will bring to the company over the course of their relationship. CLV is a useful tool for understanding how much revenue a customer is likely to generate for a company, which can help businesses make informed decisions about how much they should spend on acquiring new customers and retaining existing ones.
Calculating Customer Lifetime Value
There are several methods for calculating CLV, but the basic formula is:
CLV = (average revenue per customer per year) x (customer lifespan)
To calculate the average revenue per customer per year, businesses can divide their total revenue by the number of customers they have in a given year. To calculate the customer lifespan, businesses can use data on how long their average customer remains a customer.
For example, if a company has 1,000 customers and generates $1 million in revenue in a year, the average revenue per customer per year would be $1,000. If the average customer remains a customer for 3 years, the CLV for each customer would be $3,000 ($1,000 x 3).
Benefits of Customer Lifetime Value
Understanding customer lifetime value can be incredibly valuable for businesses. It can help businesses:
- Determine the value of different customer segments: By calculating CLV for different customer segments, businesses can identify which segments are most valuable and prioritize their marketing and retention efforts accordingly.
- Determine how much to spend on customer acquisition: Knowing how much a customer is worth can help businesses determine how much they should spend on acquiring new customers. For example, if the CLV of a customer is $3,000, a business might be willing to spend up to $1,000 to acquire that customer.
- Prioritize customer retention efforts: Since existing customers are more valuable than new customers, businesses can use CLV to identify which customers are at risk of leaving and prioritize their retention efforts accordingly.
- Improve customer experience: By understanding which customers are most valuable, businesses can invest in improving the customer experience for those customers and increase their likelihood of remaining loyal customers.
Limitations of Customer Lifetime Value
While CLV is a valuable metric, it does have its limitations. For example:
- It is based on assumptions: CLV is based on assumptions about customer behavior and retention rates, which may not always be accurate.
- It doesn’t account for external factors: CLV doesn’t take into account external factors that may impact customer behavior, such as changes in the market or the economy.
- It doesn’t account for referral value: CLV doesn’t take into account the value of customers who refer new customers to the business.
How top brands make the best use of Customer lifetime value
Top brands make the best use of customer lifetime value by using it as a strategic tool to drive business growth and profitability. Here are some ways in which top brands use customer lifetime value:
- Customer segmentation: Top brands use customer lifetime value to segment their customers into different groups based on their value. This helps them to tailor their marketing strategies to each group, providing them with personalized offers, promotions, and experiences that are most relevant to them.
- Customer retention: Top brands recognize that retaining existing customers is more cost-effective than acquiring new ones. They use customer lifetime value to identify their most valuable customers and prioritize retention efforts for them. This includes providing excellent customer service, offering loyalty programs, and personalized recommendations to keep them engaged and loyal.
- Customer acquisition: Top brands use customer lifetime value to determine how much they should spend on customer acquisition. They understand that acquiring new customers can be expensive, and by using customer lifetime value, they can make informed decisions about how much to spend on customer acquisition.
- Product development: Top brands use customer lifetime value to gain insights into customer preferences and behaviors. This information helps them to develop new products and services that meet the needs and desires of their most valuable customers, increasing the likelihood of customer retention and repeat purchases.
- Forecasting revenue: Top brands use customer lifetime value to forecast revenue and growth potential. By projecting the future value of their customer base, they can make informed decisions about investments in marketing, sales, and customer service.
How to increase customer lifetime value in eCommerce business?
Increasing customer lifetime value (CLV) is crucial for the success of any ecommerce business. Here are some ways to increase customer lifetime value in ecommerce:
- Personalization: Personalization is key to increasing customer engagement and loyalty. Use customer data to personalize the shopping experience, including product recommendations, offers, and promotions tailored to their preferences.
- Upselling and cross-selling: Suggest complementary or higher-end products during the checkout process or on the product pages. This can encourage customers to purchase additional items and increase their CLV.
- Loyalty programs: Implement a loyalty program that rewards customers for repeat purchases, referrals, and social media engagement. This can incentivize customers to keep coming back and increase their CLV.
- Email marketing: Use email marketing to stay in touch with customers and provide them with valuable content, offers, and promotions. This can encourage them to make repeat purchases and increase their CLV.
- Excellent customer service: Providing excellent customer service can help to build customer loyalty and increase their CLV. Respond to customer inquiries and complaints promptly and professionally, and go above and beyond to solve their problems.
- Post-purchase follow-up: Follow up with customers after they make a purchase to ensure they are satisfied with their purchase and offer additional assistance or support. This can improve customer satisfaction and increase their CLV.
- Retargeting: Use retargeting ads to remind customers of products they have viewed or added to their cart but not purchased. This can encourage them to complete their purchase and increase their CLV.
The Bottom Line
Customer lifetime value is a key metric that can help businesses understand the value of their customer base and make informed decisions about marketing, customer acquisition, and retention. While it has its limitations, understanding CLV can help businesses prioritize their efforts and invest in improving the customer experience for their most valuable customers.