If you’re looking to maximize your customer lifetime value, then using the CLTV formula is a great way to do it. This blog post will show you how to use the CLTV formula and what benefits it can bring.
I remember when I first started my business, I had no idea how important customer lifetime value was. I quickly learned that if I wanted my business to be successful, I needed to focus on maximizing customer lifetime value. And using the CLTV formula was a great way to do that.
The CLTV formula takes into account several factors including purchase frequency, average order size, and retention rate. By taking all of these factors into account, you can get a clear picture of how much each customer is worth over their lifetime with your company.
Using the CLTV formula has helped me tremendously in growing my business and keeping customers happy – which leads to even more loyal customers down the road!
What is the CLTV Formula?
Customer lifetime value (CLV, CLTV, or LTV) is a metric that indicates how much revenue you can expect from a single client over the lifetime of your relationship with them.
The metric compares a customer’s revenue value to the predicted customer lifespan.
The longer that customer continues to buy from you, the higher their lifetime value is.
This measure is something the customer support team can directly impact during the customer journey.
The customer support and account management teams help solve issues, offer suggestions, and answer questions that keep customers happy and loyal.
Customer Lifetime Value is a helpful way for businesses to identify which customers are worth the most to them. By focusing on these high-value clients, companies can improve the overall profitability of their business.
It makes more sense to focus on selling to existing customers than trying to acquire new ones.
To recoup your investment, you want to ensure that you have customers who are happy with your products or services.
What you don’t want is for customers to churn, leaving you to constantly scramble for new business. To help reduce this risk, measure your customer’s lifetime value.
This tactic will help you retain your most valuable customers and bring in more business.
Why is Customer Lifetime Value Important?
Here are four reasons why your CLTV is important.
1. More Revenue Over Time
The more value a customer brings to your business, the more profit you earn. This is why it’s important to track and improve customer lifetime value.
CLV is a key metric for businesses as it allows them to identify and serve their most valuable customers. By understanding what these customers want and need, businesses can keep them happy and encourage them to spend more money. This, in turn, leads to increased revenue over time.
According to research, 55% of businesses that have grown their customer base think that investing in their customer service teams is “very” important to their continued growth.
In fact, 29% of companies who see their revenues either stagnate or decrease say that CX is “very” or “extremely” important to them.
Companies that are focused on providing a positive customer experience enjoy more revenue thanks to customer satisfaction.
2. Improve Customer Loyalty and Retention
If you prioritize Customer Lifetime Value, you can identify trends that are concerning and take action to address them before they cause your business to suffer.
By analyzing the CLV, you can determine where you need to focus your efforts. Perhaps your customer service or loyalty strategies need to be improved.
3. Target Ideal Customers
When you know how much each customer spends with your company, you can calculate their average value over a certain period — whether it’s $50, $500, or $5000.
Knowing which customers are the most valuable to your business, you can develop a strategy for targeting those high-paying, long-term patrons.
4. Reduce Customer Acquisition Costs
As pointed out by a recent article in the European Business Review, acquiring customers is 5 times more costly than retaining them.
A study by Bain and Company discovered that a 5% rise in customer retention can result in a 25% to 95% boost in profits.
These numbers show why it’s essential that companies identify and cultivate their most important clients.
By following these simple steps, you’ll increase your profits, increase your customers’ LTV, and reduce your customer acquisition expenses.
Customer Lifetime Value Model
Companies use two models to calculate a customer’s worth.
While both methods have their pros and cons, it’s important to consider which method will be best for your business.
Predictive Customer Lifetime Value
The predictive CLV model uses regression analysis or machine learning algorithms to forecast the purchasing behaviors of new and existing clients.
Using predictive analytics, you can determine who your highest-value customers are, which products or services bring in the most revenue, and what you can do to improve retention.
Historical Customer Lifetime Value
The “traditional” method of determining customer value is to look at only their past behavior. This method doesn’t take into account the future actions of that individual.
This model is most effective when a customer only interacts with your company for a limited amount of time.
This model has a major drawback, however, because active customers who were once deemed “valuable” may later become “inactive” and no longer be worth tracking.
On the other hand, if a customer hasn’t bought from you in a while, they might start buying again, and you could miss out on them because you’ve labeled them as “inactive.”.
Customer Lifetime Value Formulas
Knowing the different ways to calculate CLTV can be useful for many businesses.
By knowing what your customers like about your product, you can better tailor your product to their needs. This will lead to higher retention rates and a more successful business overall.
As we look at the most popular CLTV models, we’ll examine the different factors that go into each.
1. Average Purchase Value
To figure out your average order size, take the total amount of money that your business has made from sales, and divide that by the total number of orders that have been placed.
2. Average Purchase Frequency Rate
To figure out your purchasing frequency, simply divide the total amount of purchases made by the total number of customers that made a purchase.
3. Customer Value
To figure out how much a customer is worth, simply take your average order value and multiply it by how often they make a purchase.
4. Average Customer Lifespan
To calculate the average customer lifespan, simply take the average number of years that a customer continues purchasing from your company.
How to Increase Customer Lifetime Value
Now that you have an idea of how much a customer is worth to you, here are some ways you can increase their value to your company.
1. Optimize Your Customer Onboarding Process
Onboarding is the process where new customers are brought up to speed with a brand. This typically happens after a customer makes their very first transaction.
When a customer returns to your site or reaches out to you by email, they are learning more about how your business operates and what you can provide them with. By providing them with excellent onboarding, you can ensure that they stay around and continue to purchase from you.
To succeed, you need to make this as simple as possible.
Use your customer information to send them personalized deals and offers. Follow up with an email to make sure what they’ve bought is meeting their needs.
By optimizing your onboarding process, you can establish a strong foundation for long-term relationships with your customers. This can help increase your CLTV in the long run.
2. Increase Your Average Order Value
One of the best ways to increase your customer LTV is to increase the AOV of each transaction.
You can increase a customer’s lifetime value by upselling and cross-selling complementary products to the ones they are about to purchase. Companies such as Amazon.com and Mcdonald’s use this tactic very well.
Amazon often groups similar products together for you to purchase.
Meanwhile, McDonald’s offers a variety of small add-ons such as apple pies and sundaes that help to increase the overall customer lifetime value.
Subscription-based companies can increase the average order and CLTV by encouraging customers to switch to annual billing.
A small increase in order value will lead to higher lifetime customer value and total revenue.
Let’s take a look at the McDonald’s example.
While a dollar per apple pie does not seem a lot, these small purchases can amount to significant revenue over time and help increase overall CLTV.
3. Build Long-Term Customer Relationships
If you want to build long-term relationships with your clients, you need to focus on building trust. This doesn’t mean just offering the lowest prices. You also need to provide an excellent overall experience that keeps customers coming back to you.
With the rise in social media, customers want more than just a business relationship with your company — they want to connect with you on a personal level.
Don’t just spam your Facebook page with ads. Interact with your followers by replying to their comments and asking questions. Post interesting, relevant, and non-promotional content that your audience will enjoy.
Your team could start a conversation with your prospective customers. By learning more about them, you can better understand their needs. You can also do some social media research to learn more about your customer’s interests and send them a small, complimentary gift to align with those.
By doing these things, you can build lasting relationships with your prospects and customers.
If you want to stand out from the competition, you need to offer fast and pain-free online purchasing. If you can do this, customers will continually come back to you, increasing your customer lifetime value and your profits.
4. Take Good Advice
Listening to your customers is a great way to improve your business. By listening to their advice, you can increase your CLTV.
For instance, you can create a survey about new products or services and see how your customers feel about them. Don’t limit them to specific options; let them add their own suggestions.
While not everyone will respond to a customer feedback form, those that do can provide valuable insight into how you can improve your business.
If your customers come up with good ideas, make sure to thank them. This not only shows that you appreciate their input but may also encourage them to be loyal to you. Consider thanking them with a small gift, too.
It’s important to listen to your customers because too many companies assume they know what their customer wants better than the customer does. This can lead to decreased customer loyalty and, ultimately, lower lifetime value. By listening to customers and responding, you can increase loyalty, boosting your LTV.
5. Empower Easy Connections
Consumers don’t want to wait for brands to talk to them or respond to their inquiries. A recent survey found that 88% of customers expect an email response within 1 hour.
While it’s not always possible, you can implement practices to shorten your response time.
By equipping your customer support team with the tools needed to answer customer questions on social, you can jumpstart the relationship with your customers and show them that you actually care about what they have to say.
CLTV is now dependent on customer relationships, which need constant nurturing.
While it may be impossible to respond to all emails within an hour, the simpler you make it to contact your business, the more your customers will feel connected to you. They’ll feel more loyal to you and more likely to come back for more.
6. Improve Your Customer Service
90% of American consumers say good customer service is a factor in deciding whether or not to buy from a company.
If you want to improve your CLTV, you should focus your efforts on improving your customer service. This includes offering personalized services, omnichannel support, and fair return policies.
The happier your customers are, the more likely they are to stick around.
If you stand by your high-quality products with generous returns and refunds, it tells customers that your top priority is customer satisfaction, not sales.
The result? Increased CLV.
The Benefit of Customer Lifetime Value
The customer lifetime value metric is an important one for businesses to understand. It helps identify which customers are the most valuable in terms of spending and loyalty. By understanding this metric, businesses can make decisions that will help them keep their most valuable customers happy and engaged.
If you’re looking to maximize your customer lifetime value, then using the CLTV formula is a great way to do it. By taking all of these factors into account, you can get a clear picture of how much each customer is worth over their lifetime with your company. Using the CLTV formula has helped me tremendously in growing my business and keeping customers happy – which leads to even more loyal customers down the road!