How to understand and increase customer lifetime value
Customers are different from each other and can be measured with a specific value. This is what is known as customer lifetime value or CLV . It is the most important metric that businesses are unaware of. Many marketers and other specialists have been pointing out the importance of knowing the CLV for years, but it is still ignored or underused by most people.
Discovering the customer's lifetime value
The lifetime value of the customer or Customer Lifetime Value is, in very simple terms, the value that a customer has for the business in a given period.
In other words, CLV is what a customer contributes to a business throughout the time they have a business relationship. It is a very important metric, because, as we will see, it costs less to keep or maintain existing customers than to get new ones, so increasing the value of current customers of your business is a very good way to grow.
Benefits of knowing the CLV
Calculating the CLV of your customers can help you in many ways, especially when making decisions for your business. Knowing it, you can determine, for example:
- How much you can spend to get similar customers and make a profit
- Which of your products or services customers with the highest CLV want
- Which of your products or services has the highest profit margin
- What type of client is most profitable for your business
Together, all this data can help you significantly increase the profitability of your business.
How is CLV calculated?
The easiest way to calculate CLV is to take the income that a customer leaves your business during their entire relationship and subtract everything you spent to attract and serve that customer:
Revenue per customer - Acquisition cost = Life value
The longer you keep your customers buying from your business and the higher the sales, the greater the lifetime value, as long as the cost of obtaining those customers does not increase proportionally.
Simple? Yes and no. Although the formula for calculating CLV can be summarized in a simple subtraction, understanding all the factors involved can be a bit more complex.
Taking customer lifetime value to the next level
To accurately calculate the lifetime value of the Client you will first need to be very clear about some basic concepts:
- Average purchase value or average ticket. Calculate this number by dividing the total revenue of your business in a given period (usually a year) by the number of sales made during that time.
- Average purchase frequency. Find out this amount by dividing the number of sales of your business by the number of unique customers who made purchases during that period.
- Customer value. Obtain this number by multiplying the average purchase value by the average purchase frequency.
- Average customer life. Get to this amount by calculating the average number of weeks, months, or years that customers continue to buy from your business.
- Customer lifetime value. Multiply the customer's value by the average lifetime of the customer. This way you will know the income that you can expect an average client to generate during the time that they maintain a relationship with your business.
Let's see a practical case:
Andrea has a small cafeteria where occasional clients and some recurring clients come to. After dividing the income obtained by the cafeteria during a week by the number of orders (sales) made during that same period, he finds that his average ticket or average purchase value is $ 59 pesos .
The next step is to divide the number of sales made during the week by the number of individual customers who made them. Thus, you get an average purchase frequency of 4 .
Now you know how much your customers spend on average and how many times a week they visit.
Subsequently, you must multiply the average value by the purchase frequency. This operation shows that the customer value is 236 .
If the cafeteria has 100 customers, of which 50 buy during 1 week; and 50 buy for 52 weeks, so (50 x 1) + (50 x 52) = 2,650. Now you have to divide that number by the number of customers in the cafeteria (that is, 2,650 / 100) to find that the average customer life is 26.5 weeks .
Finally, we multiply the value of the customer (236) by the average life of the customer (26.5) to find that the lifetime value of the customer of Andrea's cafeteria is $ 6,254 pesos.
Why is customer life value important?
Helps you know how much you should spend to get customers
The cost of acquiring a customer might be more than the profit from their first purchase, but what if you continue to profit from that same customer over time? Knowing the customer's lifetime value or CLV will give you the answer.
Allows you to segment your customers based on their value
Knowing the CLV helps you focus. For example, you can find out who your most important or VIP customers are and send them gifts or special offers to retain them, or focus on acquiring new customers who are similar to them. You can also gradually try to sell more to prospective customers to increase their CLV. This type of targeting allows you to provide personalized experiences, which is something many customers are looking for today.
It is key to the growth of your business in the long term
CLV is a customer-centric metric and a very good basis for planning with the goals of retaining the most valuable customers, increasing revenue from prospective customers, and improving the overall customer experience.
Even the process of discovering the CLV is valuable
The advantages of determining the customer's lifetime value are not just the end result, but all the calculations and findings you make in your business to get there.
Determining the CLV will make you analyze not only sales, but the entire path of your customers: when, why and how often they buy. All these answers will give you valuable insights and will help you detect aspects that you may not have noticed before.
How to improve the CLV of your business?
Even knowing that there are several ways to earn income, customer satisfaction and retention are key to increasing CLV.
Making your customers happy generally results in them making more purchases from your business. Companies that actively work to achieve customer satisfaction generate more revenue than those that consider it unimportant.
Acquiring a new customer can be expensive. Various analyzes indicate that it can actually cost 5 to 25 times more than retaining an existing customer. In addition, the probability of achieving a sale to an existing customer is 60-70%, while to a new one they are between 5 and 20%. Furthermore, it has been calculated that a 5% increase in customer retention can lead to an increase in profits of between 25 and 95%. That is why it is imperative that your business identify and 'consent' to the most valuable customers, because by doing so you will get more income that will translate into an increase in CLV.
So instead of focusing on the first purchase, focus on getting customers to make the second purchase. It is between those two moments where customers are generally lost. Work to understand their purchase intentions and adjust the experience you offer them accordingly.
These are some very useful actions to incline a customer to buy more from your business:
- Create attractive, easy-to-earn rewards or benefits to encourage frequent purchases.
- Offer free gifts or product to repeat customers to build brand loyalty.
- "Tie" additional items to a purchase to increase the average ticket, for example, offering packages, combos or discounts 2 × 1 or 3 × 2.
- Stay in contact. Your old clients want to feel like you haven't forgotten them. Help them locate you and get closer.
In conclusion, you will build a more successful and profitable business if you focus on attracting and retaining long-term customers who become fans or ambassadors, and therefore repeat buyers.