Customer Lifetime Value: Formula & 5 Tips to Increase Yours
Mar 06, 2023 | 11 min read | Leave a comment
As a business owner, you know how important it is to understand the value of your customers.
You’ve put in a lot of time and effort to develop a devoted client base, but you can’t seem to pin down how much they’re worth to your company.
This is where the concept of a customer lifetime value (or CLV), comes into the game.
By calculating CLV, you can determine the lifetime value of a customer to your business and make informed decisions on how to acquire, retain, and reward them.
Still feel in the dark about this topic?
No worries! In this article, TrueProfit will delve into all the basic facts about CLV, and surely help you gain confidence on your business journey!
More specifically, we will discover:
- What CLV is and its importance for eCommerce stores.
- How it is different from Lifetime Value (LTV).
- How to calculate it.
- Best practices and real-life examples of CLV.
What Is Customer Lifetime Value (CLV)?
So, what is CLV anyway? Customer lifetime value (CLV) is a way for businesses to figure out how much money they can expect to make from a customer over the entire time they do business with them.
In other words, CLV can be interpreted as the representation of the total value a customer brings to a business over the entire duration of their relationship.
- For example, let’s say you have a regular customer who comes to your lemonade stand every day and spends $2 on a glass of lemonade. You estimate that this customer will continue to come to your stand until the end of next year.
That means the total revenue you can expect to earn from this customer is $2 x 365 days = $730 and this is CLV.
- Now, let’s compare this to an occasional customer who comes to your stand once a month and spends $3 on a glass of lemonade. You estimate that this customer will only come to your stand once for the next three months.
That means the total revenue you can expect to earn from this customer is $3 x 3 = $9.
Through CLV, it shows that even if the occasional consumer pays more per glass of lemonade, the regular customer is worth more to your company since they buy more often and for longer.
This is why understanding the CLV of your customers is so important! It helps you identify the customers who are most valuable to your online business, so you can focus on retaining them and providing them with excellent service.
What Is The Difference Between CLV And LTV?
If you’ve heard about LTV (Lifetime Value), you may have already been familiar with the concept of understanding the long-term value of a product or customer.
However, through this article, you may also be confused with CLV (Customer Lifetime Value), which specifically measures the value of a customer over the entire duration of their relationship with a business.
While both metrics are valuable for understanding the long-term value of investments, it’s important to understand the differences between them and how they can be used to back up strategic decisions:
- CLV specifically measures the value of a customer, taking into account their purchasing behavior, frequency of purchases, and other factors that may influence their buying decisions.
It helps businesses identify their most valuable customers and make informed decisions about marketing, customer acquisition, and retention strategies.
- LTV, on the other hand, is a broader metric that can be applied to a variety of things, including products, brands, or customer segments.
It measures the total value of something over its entire lifetime, including any future earnings or cash flows. This makes it a valuable tool for businesses looking to estimate the long-term value of their investments and make strategic decisions about where to focus their resources.
Importance Of Customer Lifetime Value
Without doubts, Customer Lifetime Value (CLV) is an important metric for businesses of all sizes, as it helps them understand the long-term value of their customer relationship management.
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Still wonder how it can benefit your business? Here are some of the key reasons why CLV is so important:
- Improve customer acquisition: By understanding the value of your existing customers, you can better target your marketing efforts and acquire new customers who are likely to be just as valuable over the long term.
- Enhance customer retention: Knowing the CLV can help you identify your most valuable customers and develop thorough retention strategies to keep them coming back.
- Increase revenue: By keeping your best clients around, you may boost your earnings per client and expand your clientele’s worth.
- Better decision-making: By focusing on the goods and services that bring in the most CLV, you can make more informed choices about how to best deploy your company’s resources.
- Improve profitability: CLV can help you decide how much to invest in client acquisition and retention, allowing you to maximize your profit margins over the long run.
How to Calculate Customer Lifetime Value?
Calculating customer lifetime value (CLV) involves several steps, but here’s a general customer lifetime value formula that you can use:
Let’s break down each of these components:
- Average Value of a Sale: This is the average amount of money that a customer spends per transaction. To calculate this, you can divide your total revenue by the number of transactions over a given period of time.
- Number of Repeat Transactions: This is the number of times a customer is likely to buy from you over the course of their lifetime. To estimate this, you can look at historical data on customer retention rates or conduct surveys to ask customers how often they plan to buy from you in the future.
- Average Retention Time: This is the average amount of time that a customer stays loyal to your business. To calculate this, you can look at historical data on customer retention rates or conduct surveys to ask customers how long they plan to keep buying from you.
Once you have these 3 pieces of information, you can plug them into the formula to calculate the CLV for each customer.
Using an app
Although manual methods can be somewhat okay if you do it right, they typically require a lot of time and effort to complete. This is especially true in today’s fast-paced world, where people are constantly on the go. Moreover, because of the difficulty and expense involved when the stores expand, the manual method may not be as accurate as it used to be, along with the ability to keep up in real-time. As a result, many apps have been created to serve various purposes and make our lives easier.
TrueProfit is an app from OneCommerce that helps businesses calculate their customer lifetime value. While manual methods work well for low-volume sellers, as sales volume increases, recording data manually using spreadsheets becomes inefficient since it will cost a lot of time and effort for your team to collect and update data over and over.
TrueProfit offers a simplified approach to CLV and all kinds of financial metrics that take into account the total revenue generated by a customer, as well as the costs associated with acquiring and servicing that customer.
The app also provides insights into customer behavior and helps businesses identify areas where they can improve customer engagement and retention.
By using TrueProfit, businesses can gain a better understanding of the value that each customer brings to their bottom line and make informed decisions about their marketing and sales strategies.
To calculate customer lifetime value (CLV) using the TrueProfit app, follow these steps:
- Step 1: Sign up for a TrueProfit account and connect it to your Shopify store.
- Step 2: Set up some basic values, including cost of goods sold, shipping rules, ad spend,…
- Step 3: Once you have a sufficient amount of customer data, the app will use its algorithm to calculate each customer’s CLV.
- Step 4: TrueProfit takes into account factors such as the customer’s purchase frequency, order value, and acquisition cost to estimate their lifetime value.
- Step 5: The app also provides insights into customer behavior and helps you identify areas where you can improve customer engagement and retention.
By using TrueProfit, you can gain a better understanding of the value that each customer brings to your business and make informed decisions about your marketing and sales strategies.
Using TrueProfit to calculate customer lifetime value is a relatively simple process. The app does the heavy lifting by analyzing customer data and providing insights into customer behavior. This can save businesses a lot of time and resources that they might otherwise have to spend on manual calculations and data analysis.
Plus, the app’s user-friendly interface makes it easy to navigate and interpret the data, so businesses can make informed decisions about their marketing and sales strategies based on the insights provided by TrueProfit.
Customer Lifetime Value Examples
While it’s important to understand the theory and best practices behind increasing customer lifetime value, it can be difficult to put them into practice without real-world examples. Plus, seeing how other businesses have successfully increased their CLV can provide valuable insights and inspiration for your own efforts.
With that said, here are some real-life examples of customer lifetime value (CLV):
- Starbucks: Starbucks estimates that the CLV of a loyal customer is around $14,000, which is nearly three times the value of an occasional customer. This is due to the fact that loyal customers visit Starbucks more frequently, purchase more items per visit, and are more likely to try new menu items.
- Amazon: Amazon’s CLV varies depending on the product category, but on average, a loyal customer is worth around $1,400 over their lifetime. This is because Amazon’s loyal customers tend to make more frequent purchases, have larger order sizes, and are more likely to subscribe to services like Amazon Prime.
- Zappos: Zappos, the online shoe retailer, has built its business around providing exceptional customer service. Therefore, the company’s loyal customers have a CLV that is 75% higher than that of its occasional customers. This is due to the fact that loyal customers are more likely to make repeat purchases and refer their friends and family to Zappos.
These examples demonstrate the importance of customer loyalty and the impact that it can have on a business’s bottom line. By closely monitoring CLV metrics, improving the customer experience, and building strong relationships with customers, businesses can increase their CLV and drive long-term growth.
5 Tips to Increase Customer Lifetime Value
Successful CLV examples are helpful, but so are the best practices for establishing CLV in your own company. By adopting these ideas, you may get insight into your clients’ actions and preferences, improve the effectiveness of your advertising, and, eventually, grow your business.
Here are a few ideas to think about:
- Focus on customer experience: Providing exceptional customer service and creating a positive customer experience can go a long way in building customer loyalty and increasing CLV. This includes things like personalized interactions, fast and efficient service, and resolving customer complaints and issues quickly.
- Offer loyalty programs: Loyalty programs are a great way to incentivize customers to make repeat purchases and increase their lifetime value. This can include things like offering discounts or rewards points for every purchase, or providing exclusive access to special promotions or products.
- Upsell and cross-sell: Encouraging customers to purchase additional products or services can help to increase their lifetime value. This can be done through upselling (offering a higher-priced product or service) or cross-selling (offering a complementary product or service).
- Encourage referrals: Referral programs can be a powerful tool for increasing customer loyalty and lifetime value. By offering incentives for customers to refer their friends and family, businesses can tap into the power of word-of-mouth marketing and acquire new customers at a lower cost.
- Monitor and analyze customer data: Tracking customer data and analyzing customer behavior can provide insights into how to improve the customer experience and increase CLV. This includes things like monitoring purchase history, analyzing customer feedback, and tracking engagement with marketing campaigns.
By implementing these best practices, businesses can improve customer loyalty, increase CLV, and drive long-term growth.
|💡 Want more battle-tested tips & tricks? Check out our article on How to Increase Customer Lifetime Value: 10+ Proven Tactics|
As the curtains close on our guide to customer lifetime value (CLV), we hope you’re now equipped with the knowledge and tools needed to take your business to new heights.
From understanding the fundamentals to implementing strategies that increase customer loyalty and profitability, you’re now primed to succeed in a crowded and competitive marketplace.
Remember! While the road ahead may be long and challenging, the rewards of implementing CLV strategies are well worth the effort!
So, just take the leap, embrace innovation, and join the ranks of successful businesses that have unlocked the full potential of their customer base with CLV.
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