Measure The Monetary Value of Each Customer With Customer Lifetime Value
What is the customer lifetime value?
Customer Lifetime Value is a metric that predicts the total net profit a business can expect to earn from a customer throughout their entire relationship.It helps companies understand the value of each customer, guiding decisions on customer acquisition, retention, and marketing strategies.If customers continue to purchase from you repeatedly, that’s usually a good sign you’re doing the right things in your business. Furthermore, the larger a customer lifetime value, the less you need to spend on your customer acquisition costs.
When measuring CLV, it’s best to look at the total average revenue generated by a customer and the total average profit. Each provides important insights into how customers interact with your business and if your overall marketing plan is working as expected.
Why is customer lifetime value important?
Understanding CLV allows you to make informed decisions based on how long a customer typically buys from you and what they spend over the lifetime of that relationship. This metric can help inform your strategy on acquisition, customer retention, customer support, and even the quality of your products and services.
Advantages of Customer Lifetime Value
- Improve Customer Retention:
One of the biggest factors in addressing CLV is improving customer retention and avoiding customer attrition. Tracking these details with accurate segmentation can help you identify your best customers and determine what’s working well.
- Drive Repeat Sales:
Some retailers, tech companies, restaurant chains and other businesses have loyal customer bases that come back again and again. You can use CLV to track the average number of visits per year or over the customer lifetime and use that data to strategize ways to increase repeat business.
- Encourage Higher-Value Sales:
Netflix is an example of a business that improved CLV through higher pricing but learned years ago that increasing costs too quickly may scare off long-time customers. The right balance is key to success here.
- Increase Profitability:
Overall, a higher CLV should lead to bigger profits. By keeping customers longer and building a business that encourages them to spend more, you should see the benefit show up on your bottom line.
How to Calculate Customer Lifetime Value?
The formula for Customer Lifetime Value is:
Lifetime Value = (Average Revenue per Account) x (1 / Logo Churn Rate) x (Gross Margin %)
Customer Lifetime Value (CLV) Example:
Consider a SaaS company with a customer paying a $50/month software license fee. The average gross margin on this license is 85% and based on historic trends, the customer is expected to be a customer for 52 months. In this situation:
LTV = $50 * .85 * 52 = $2,210
Ways to improve CLV
Here are some proven techniques to improve the customer experience and bottom line:
- Make it easy for customers to return items they’ve purchased from you. Making it hard or expensive will lower customer satisfaction and reduce the odds of them making another purchase.
- Make strategic exceptions for your most loyal customers. For example, if someone is planning on canceling a subscription service you offer, give them an option of remaining a user with a small discount.
- Interview and connect with your best customers to understand why they continue to choose your brand.
- Set expectations regarding delivery dates, aiming to underpromise and overdeliver. It’s much better to promise delivery by August 1 and have it in their hands by July 20 than the reverse.
- Create a loyalty program. Encourage repeat purchases with rewards that are both attainable and desirable.
- Reward loyal customers. Offer freebies for doing business with you to build brand loyalty.
How to monitor Customer Lifetime Value in Real-time
Once you have established metrics for measuring Customer Lifetime Value (CLV), you’ll want to establish processes to monitor this and other SaaS KPIs on a continual basis. Dashboards can be critical in this regard.