The lifetime value of a customer is a business metric that refers to the overall worth of a customer from when they make their first purchases to their last.
Keeping track of your customer lifetime value (CLV) is highly beneficial for your business; some of its benefits include:
When it comes to calculating the lifetime value of a customer, businesses tend to choose between two key models:
To calculate the lifetime value of your customers, there are many formulas that you will have to know. In addition, each of these metrics can be used independently to identify core pain points regarding your CLV.
The first key metric you need to know is the average purchase value. This is the typical amount a customer will spend in a single session.
To calculate the average purchase value, divide your company's total revenue for the year and divide it by the number of purchases for the year.
The average purchase frequency rate will tell you how often your customers make a new purchase over a certain period of time.
To calculate your average purchase frequency for a given year, you need to divide the total number of sales by your number of customers for that year.
Once you have calculated your average purchase value and average purchase frequency rate, you can calculate your customer value.
To calculate your customer value multiply the average purchase value by the average purchase frequency rate.
To give you an example of a customer value, if your average purchase value was 100 pounds and your customers typically made three sales with you, that customer’s value would be 300 pounds.
To calculate the average lifetime value of a customer, you will need to know the average lifespan of your customers.
To calculate the average customer lifetime value, you need to divide the sum of all your customer lifespans and divide that figure by the number of customers you had over that period.
To calculate the average lifetime value of a customer, you need to multiply your average customer value by your average customer lifespan.
For example, if your customer's value is 300 pounds for a year and they usually continue making purchases for three years, your customer's lifetime value is 900 pounds.
If you feel your customer's lifetime value is low, there are several ways you can boost your CLV.
The first place you’ll want to look at is your customer service. 82% of customers stop doing business with a company because of poor customer service!
To improve your customer service, you could:
In 2020, the global customer relationship management(CRM) market was already 52 Billion dollars and is estimated to double by 2028! This market's expansion can be directly correlated to the value it brings businesses; If there isn’t a strong bond between your business and your customers, there will be less friction when moving away from your business and onto your competitors. To further reduce your churn rate and boost the average lifetime value of a customer, you could:
Of course, your marketing channels are a key component in getting new customers, but you shouldn’t forget that your marketing channels can also be used to retain your current customers! There are several ways you can use your digital marketing channels to improve your customer lifetime value.
One of the biggest factors at play when calculating a customer's lifetime value is the average lifespan of your customers. If your customers have a lifespan of less than one year, then you should consider offering longer billing cycles if possible. For example, if you are in the SaaS industry, you could offer a discount for an annual subscription.
If you are an eCommerce business that doesn’t cater for a subscription module, changing billing cycles won’t be applicable for you however, there are still ways that you can use the lifespan of your customers to your advantage! For example, if you find that your customers tend to churn at month ten, you could create a special offer for your customers that are in their tenth month of business with you.
Another way you can improve your customer's lifetime value is by improving your average purchase value; you can do this by improving your expansion revenue. There are three main ways that you can boost your expansion revenue.
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