Customer Lifetime Value: The Lifelong Worth of a Customer
- September 5, 2023
- 12 mins read
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Table of Content
Do you prefer engaging in transactions with clients who provide big amounts on rare occasions? Or do you lean towards those who consistently make smaller payments throughout the year? Indeed, there is a correct answer to this question, and trust me, it doesn’t rely on your instincts. To respond like an expert, you should start by calculating the customer’s lifetime value. This metric helps identify the customers that contribute greater value to your company, ensuring its long-term viability. Sounds interesting? Keep reading this space to know more!
With this data, let’s consider the example of a father who consistently buys smartphones for his family. His value could be estimated as:$2,000 (per smartphone) × 2 (smartphones per year) × 10 (years) = $40,000Hence, the Customer Lifetime Value amounts to $40,000.These instances highlight how lifetime customer value differs in various sectors. Everyday items like coffee witness frequent purchases, necessitating repeated transactions for a notable CLV. On the other hand, certain products like houses, cars, or interior design services boast lower buying frequencies. Yet, due to their unique nature, they accumulate substantial sums through just a handful of transactions.
What is Customer Lifetime Value (CLV)
Customer Lifetime Value, known as CLV, pertains to the overall earnings a business generates from a single customer over the time span of their engagement with the company. This metric helps to understand customer behaviors, including their purchasing patterns and expenditures on the company’s offerings.Customer lifetime value refers to the complete value a customer brings to a business throughout their entire interaction with the brand. Instead of focusing on single transaction values, this metric considers all possible transactions that could occur over the duration of the customer’s relationship with the brand, calculating the precise revenue generated from that customer. So, here to increase CLV, retaining your customers is very important. Customer lifetime value can be approached from two angles: historical customer lifetime value (measuring the total amount each current customer has previously spent on your brand) and predictive customer lifetime value (estimating the potential amount that customers might spend on your brand). Both assessments of customer lifetime value offer valuable insights for gauging business achievements.-
Historic Customer Lifetime Value
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Predictive Customer Lifetime Value
How Can You Calculate CLV?
The process of calculating Customer Lifetime Value (CLV) involves four fundamental steps.1. Calculate the Average Order Value of a Customer
Find out the typical sum that customers spend at your business. You can do this by examining data from your analytics tool or approximating it from recent customer transactions over the past months.2. Determine How Often Transactions Occur
Next, ascertain the frequency at which customers visit your store. How frequently do they return within a defined timeframe? Is it on a weekly, monthly, or yearly basis?3. Calculate the Extent of Customer Retention
Determine the typical duration of customer loyalty to your business. Specific sectors like restaurants and retail often exhibit a lower CLV due to customers gravitating towards better deals. While at the same time, industries like technology and travel boast a higher CLV as customers get enhanced product features and personalized vacation experiences.4. Now It’s Time to Calculate the CLV
After gathering these details, compute CLV using the following formula:
With this data, let’s consider the example of a father who consistently buys smartphones for his family. His value could be estimated as:$2,000 (per smartphone) × 2 (smartphones per year) × 10 (years) = $40,000Hence, the Customer Lifetime Value amounts to $40,000.The Hidden Power of Customer Lifetime Value: Why It Matters
The significance of Customer Lifetime Value lies in its ability to empower you with the potential of each customer throughout their purchasing journey. CLV enables you to enhance customer loyalty, minimize attrition, and make strategic business choices to cater to customer requirements.For example, customer lifetime value can be employed to pinpoint customer groups that hold the highest value for the company, allowing for targeted approaches.Below are additional reasons emphasizing the importance of comprehending your CLV.-
Boosting CLV Can Gradually Increase Revenue
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It Helps Identify Issues and Improves Customer Retention
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It Assists in Pinpointing Your Target Audience
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Enhancing CLV Can Lead to Lower Customer Acquisition Costs
Putting Customer Lifetime Value into Action: Practical Strategies
Well, it’s time to relook the CLV formula. If your aim is to enhance the CLV metric, you must either encourage customers to raise their shopping cart value, prompt them to shop more frequently or extend their duration of engagement with your brand. Alternatively, you could elevate all these aspects to make a significant impact.The following suggestions are incredibly effective for enhancing customer lifetime value, whether you operate an e-commerce store, manage a brick-and-mortar shop, or are involved in the SaaS and subscription industry.-
Enhance Your Subscription Structure
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Ensure Customer Satisfaction
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Deliver Exceptional Customer Assistance
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Acknowledge and Encourage Customer Loyalty
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Streamline Customer Onboarding Procedures
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Send Your Emails regularly
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Upselling and Cross Selling
Exploring CLTV in Action: 3 Compelling Case Studies
The Customer Lifetime Value (CLV) fluctuates according to the characteristics of the product or service. Let’s explore diverse industries to illustrate the potential impact of CLV on your overall profitability.-
Local Market
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SaaS Subscription
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Home Decoration
These instances highlight how lifetime customer value differs in various sectors. Everyday items like coffee witness frequent purchases, necessitating repeated transactions for a notable CLV. On the other hand, certain products like houses, cars, or interior design services boast lower buying frequencies. Yet, due to their unique nature, they accumulate substantial sums through just a handful of transactions.
