Customer Lifetime Value

Customer lifetime value (CLV) is a metric that shows how much revenue the customer can bring to the business throughout their whole history of interactions.

How to calculate customer lifetime value?

For that, you need a 2-step formula. Here’s what your first step is:

Average transaction size x Number of transactions x Retention period = Lifetime value

Now, for the second part, you use the parameter you’ve just calculated:

Lifetime value x Profit margin percentage = Customer lifetime value

You can single out separate customer segments using different demographics, behavior, or other parameters, and calculate the CLV for any particular group of buyers. Knowing which customer segments have a higher CLV, you can understand what drives the high-value customers and decide what you can do to transform less valuable customers into more valuable ones.

Remember it’s much easier to keep the existing customers rather than attract new ones, and it costs you less! Improving CLV, you strengthen the relationships between you and your customers. The more loyal your customers are, the better the CLV figures are!

5 ways to improve customer lifetime value

#1 Improve customer experience

Make customers fall in love with your business! The website, products, their packaging, and their ease of use – everything is important. You need your customer to enjoy every second of interacting with your business and your products.

#2 Improve customer service

Customers can turn a blind eye to the odd website design and average packaging, but they won’t do it when it comes to customer service. The way you treat your customers is the key factor in their retention and higher CLV, so be sure it’s as top-notch as it can be.

#3 Use feedback wisely

Instead of dealing with the issues with the customers after they take place, you can predict and prevent them. Collect the information on how you can better the customer experience from the customers – regular polls and questionnaires are great ways to do it. And even if you have a dissatisfied customer – reach out to them! You can get some valuable information and gain some respect.

#4 Launch loyalty programs

Who doesn’t like extra attention and nurturing? We all know the discount cards and benefits for the store customers, extra miles and upgrades for loyal airline customers. They are common ways of keeping the customers loyal and rewarding them for being loyal, and they work amazingly.

#5 Interact with your customers outside the store

Create a blog or a social media account where you can post interesting information, updates about your store, entertaining content, and so on. You need to show your customers you’re involved in them even outside the store.

How can you benefit from the CLV data?

#1 Optimize your marketing

When you know CLV, you know how valuable customers are to you. With these insights, you can productively revamp the marketing strategy and make it work in the most fruitful and productive way for you.

#2 Boost retention

Good customer experience is the driver of customers’ retention. And when you know who buys what and how often, you can make personalized advertisements and offers made just for that particular customer group.

#3 Reevaluate expenses

CLV can show you the weak as well as the strong points of your business. That allows you to channel your expenses to improving what needs to be improved rather than wasting money on the things that don’t really need any changes.

#4 Make better strategic decisions

Knowing the behavior of your customers, you have a lot of space to think about the business decisions you make: what to sell, when to sell, how to sell, for which price, and much more. These details can protect you from making blind and possibly failing decisions at the very beginning.

#5 Win higher-value sales

Loyal customers that are familiar with your business are more likely to be the ones to consider buying something more expensive than the new ones or those who haven’t bought a thing in your shop. High-value sales mean higher profits!

Now you know what CLV is and you can use it to make your business more successful! Small business owners often disregard the importance of such calculations, but they can give a valuable and unique insight with the help of which they can reach new heights much faster. Don’t miss out!