Building Customer Lifetime Value with Clixpert Digital Agency

Businesses may have unique needs and goals, but they all aim to attract as many customers as possible and provide the best experience. That said, it’s important to remember that growing is not just about getting more customers and sales but also keeping your existing customers happy and satisfied.

Marketers often focus on one-off sales and results and forget about building long-term relationships with their client base. Yet, this is where customer lifetime value comes in. Read more about this key metric below to understand why it’s essential for your company’s success.

What is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV) refers to the total value or contribution you expect to earn from a customer over the lifetime of their relationship with your brand. The longer a customer buys from your brand or the larger their purchases, the higher their lifetime value. Generally, having a high CLV signifies a large, loyal customer base.

Why is Customer Lifetime Value Important?

What’s unique about CLV is that it’s forward-looking. Compared to other metrics that typically look at past performances, CLV looks at the future to predict how much you can potentially earn from a customer. From here, you can tailor your strategies more effectively for future growth and success. Specifically, measuring and monitoring your CLV can lead to these benefits:

• Increase revenues

  Tracking CLV is a great way to maximize your marketing budget since it allows you to nurture your customer base. Doing this can generate more sales from existing customers and build a better relationship with them. It translates to increased revenues and a better bottom line in the long run.

• Improve customer retention and loyalty

  CLV gives you more insight into how loyal your customers are and what else you can do to improve your products or services for them. Doing this can increase customer satisfaction and retention and make them more likely to stick to your brand and recommend it to others.

• Identify customers to target

  CLV allows you to segment your customers and identify which ones have the most potential to convert. It will be particularly useful for optimizing your campaigns by targeting your ads to the right users. This way, you can maximize your marketing spend and focus on the ideal customer segments.

• Reduce customer acquisition costs

  Acquiring new customers is always beneficial, but doing this isn’t cheap. On average, customer acquisition costs are five times higher than retention costs. Thus, increasing your CLV allows you to cut costs and increase your margins.

How to Calculate Customer Lifetime Value

It can be tricky to calculate CLV since you can’t pinpoint the lifetime of a customer’s relationship with your brand. Hence, you may notice that the key components in the CLV formula are just estimates. So before jumping into the formula, here are the main data points you’ll need:

• Average purchase value

  How much does a customer usually spend on an order? You can calculate this by dividing the value of all sales made within the year by the number of purchases made. If you don’t have data that far back, you can track.

• Average number of purchases

  How often does a customer purchase within a specific period? To get this, divide the number of purchases made within a period by the number of customers who purchased from you during that time.

• Average customer lifespan

  How long does the customer stick with your brand? You can calculate this by dividing the sum of customer lifespans by the number of customers you’ve had. The resulting number will be the average number of months or years that a customer continues to buy from your company.

Once you have all this information, you can multiply the average purchase value by the average number of purchases to get the customer value. From here, the formula for calculating your CLV will be as follows:

CLV = Customer Value x Average Customer Lifespan

The CLV should come out as a monetary value, reflecting the average revenue you can expect to generate per customer throughout their relationship with the brand.

Customer Lifetime Value Example

Here’s an example illustrating how to calculate it to help you visualize the CLV formula more easily. Say that there’s a hypothetical clothing company with the following data:

• Purchases totaled $3,200 in the year from five customers.
• Customers buy clothes four times a year.
• Customer lifespan is estimated at three years.

From here, we can calculate the CLV as follows:

• Average Purchase Value of $3,200/20 purchases = $160 per order
• Average Number of Purchases = 20 purchases/5 customers = 4 orders
• Average Customer Lifespan = 3 years
• Customer Value = $160 x 4 = $640
• CLV = $640 x 3 = $1,920

The resulting CLV amounted to $1,920, which means that you can expect around $1,920 in revenue from each customer within the three years that they stick to your brand.

How to Increase Customer Lifetime Value

Now that you better understand why CLV is so important for your business growth, here are some effective ways to increase this metric:

• Cross-sell and up-sell your products or services

  Cross-selling and up-selling are traditional ways to increase your CLV, and who better to engage with than your existing customers? That said, your sales team should strategize how to do this to avoid coming off as too pushy. One way to do this will be to map out the customer’s journey and identify potential products or services to offer per phase.

• Gather customer feedback

  If you want to boost customer loyalty and retention, listening to them is important. Collect feedback regularly to identify areas of improvement and make customers more satisfied with your brand.

• Engage with customers

  To make your brand more memorable, you should engage with customers actively and build a community. Nowadays, social media is a great tool to keep in touch with your customers and interact with them. By doing this, your brand becomes more relevant and relatable, making them more likely to stay loyal.

  Overall, CLV is a highly valuable metric that can help you retain customers more effectively and increase your profits in the long run. By monitoring this, you can identify potential segments to target and products to sell, resulting in more loyal customers. So if you have yet to calculate your CLV or incorporate this into your strategy, now’s the time to do so.