Key Points:
- Customer lifetime value measures how valuable a customer is to your business over an unlimited period of time, as opposed to just their initial purchase
- Customer lifetime value helps businesses determine how much revenue to generate from specific customers
- Customer lifetime value reduces the need to spend more on marketing and advertising to obtain new customers
Customer lifetime value, as known as CLV, has recently become a key metric for eCommerce businesses. But just what exactly is it? Why is it important? Here’s a look at all that and more, including how online merchants can maximize CLV to boost their online businesses!
Table of Contents
What's Customer Lifetime Value?
Customer lifetime value measures how valuable a customer is to your business over an unlimited period of time, as opposed to just their initial purchase.
With this metric, you’ll be able to determine the total worth of your business’ customers throughout the course of your relationship, as well as understand cost per acquisition more effectively.
In determining customer lifetime value, you’ll be able to understand how to retain existing customers and save money, as you don’t have to spend more in trying to acquire new customers. This way, you’re able to drive further growth as you continue to increase the value of your existing customers.
By better understanding CLV, you’re also able to obtain an accurate calculation of what it costs you to acquire each customer and how to maximize the value of your existing customers.
Why is Customer Lifetime Value Important?
Customer lifetime value is crucial for businesses to understand. Just a few reasons why include:
- High CLV boosts brand loyalty over the long-term
- Helps businesses understand how to maximize the value of their existing customer base
- Helps businesses determine how much revenue to generate from specific customers
- Understanding CLV makes it easier for companies to identify and segment the categories of customers that are more valuable to them
- Reduces need to spend more on marketing and advertising to obtain new customers
- Lowers customer cost per acquisition
- Maximizes profit
How to Calculate Customer Lifetime Value
In order to make the most of customer lifetime value, it’s important to understand how to calculate it accurately. Here are the steps to carry out an accurate customer lifetime value calculation:
1. Calculate the average purchase value
This is done by dividing the total revenue of your business in a given time period - typically one year - by the number of purchases made over the same period.
2. Calculate the average purchase frequency rate
This calculation is made by dividing the total number of purchases made by a particular customer within the given timeframe by the number of customers who also made purchases within the same time period.
3. Calculate the average customer’s value
After, multiply the average purchase value by the average purchase frequency rate.
4. Calculate the average customer lifespan
The next step in the customer lifetime value formula is performed by averaging the total number of years a customer has consistently purchased from your business.
5. Calculate the customer’s lifetime value
With all these done, the overall value is then calculated by multiplying the customer value by the average customer lifespan. With the result, you’re able to determine how much revenue to expect from each given customer while their relationship with your business lasts.
How Do You Maximize Customer Lifetime Value?
Understanding CLV is critical for SMBs - but knowing how to maximize it is even more important! Here’s a look at some tips on how to boost customer lifetime value for your business.
1. Ensure Customer Satisfaction
First and foremost - keep your customers happy!
This is the simplest and most effective way to boost CLV. Conduct customer surveys frequently to see what your company can improve in terms of customer service and hire dedicated, professional customer service representatives to address customer inquiries and concerns as soon as possible.
2. Make Sure Your Inventory Offers Complementary Products
If you sell shoes, for example, you can also offer customers products such as socks and shoe polish. This way, you can increase sales while also retaining existing customers.
3. Make The Customer Experience Personalized
Personalization is key nowadays.
Customers want to develop a close, lasting relationship with the brands they like. Accommodate this with personalized email offers addressed to them specifically, sign-in accounts that address them by their first name and the like.
Doing this will make your customers feel more appreciated and welcomed on a personal level, increasing the chances that they’ll make repeat purchases.
4. Utilize the Freemium Model
This business model makes basic services accessible to customers for free while offering improved premium services at a price. It’s often a great way to make your product or service accessible for all customers while also maximizing your profit!
5. Leverage Data and Technology
Look into software that can analyze customer behaviors, create surveys and give ratings to your customers based on their feedback and reactions. With this, you’re able to better understand how to improve your customer service.
6. Create Special Offers and Coupon Codes
There’s hardly a customer who could pass up a special offer from a business they frequently buy from!
It could be as little as a three percent discount, for example, or as high as a 50 percent discount. If doing this, only create offers and coupon codes that still protect your profit margins.
7. Offer Customers Annual Billing
This works more for companies that offer recurring products and services.
If you’re able to offer customers annual billing as opposed to monthly billing, it could potentially further boost your revenue and improve their CLV compared to a monthly subscription model, which raises the risk of customers unsubscribing after just a few months or even weeks.
8. Show Your Customers Real Appreciation
You can do this by sending them personalized email messages right after they make a purchase, personalized emails with coupon codes and the like. Show them some love!
9. Offer Loyalty Programs
This idea is built around rewarding your loyal customers by offering them the opportunity to earn points that can be used to purchase items from your store in the future. Make sure they understand that the more they buy, the more points they earn for more purchases!
10. Make the Most of Social Media
Don’t forget about the power of social media, either!
Post special offers on your social media account for customers to use when making purchases. Giving them shoutouts every few weeks to show your appreciation and express your thanks to them isn’t a bad idea either!
11. Suggest Complementary Products at Checkout
Another good way to improve CLV is to offer complementary products for customers at checkout.
For example, a customer about to buy a new shirt could be offered pants and various fashion accessories at checkout. It’s a simple but effective way to boost customer lifetime value - and sales!
12. Offer Free Shipping at a Certain Threshold
Free shipping, it goes without saying, is a great way to win customers over!
It’s a great way to improve customer satisfaction and boost your brand. However, if implementing it, place a certain purchase threshold on it in order to protect your profits.
Maximize Customer Lifetime Value to Boost Your Online Store
Knowing how to not only understand but also maximize, CLV is very important for online merchants. Doing so is simpler than it initially seems and offers many rewards, including the opportunity to maximize sales and dramatically lower your customer acquisition costs.
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