Understanding your customers' true worth is crucial in today’s competitive business landscape. Customer lifetime value calculations are powerful metrics that help you quantify the total revenue a business can expect from a single customer account throughout its entire relationship.
Customer lifetime value calculation is important because it gives valuable insights into customer behavior, preferences, and profitability. This knowledge enables you to make informed decisions about marketing strategies, product/user experiences, and overall business growth. Nudge offers a CLV solution that helps to launch in-app experiences to boost customer retention, ensuring long-term success and a sustainable business model.
This article will guide you through an in-depth understanding of Customer Lifetime Value (CLV) and its importance in helping businesses understand how valuable a customer is to them for their relationship. It will also talk about CLV strategies and their key factors. Let’s get started.
Understanding Customer Lifetime Value (CLV)
“Regularly revisit and recalculate CLV to adapt to changes in customer behavior and market dynamics”
- Andre Promet
Understanding CLV is important to get into lifetime value calculation. It also helps businesses get a clear idea about the total revenue a customer generates throughout their relationship with the company.
1. Customer Lifetime Value and its relevance to businesses
CLV is a concept that can be defined as the total of the expected value that a customer will generate for a particular product during the entire period of his/her patronage. This model evaluates the number of customers, the frequency at which a customer tends to make a purchase, and the average amount that they spend to give an overall value to the customer.
Here are some factors why CLV is important for businesses:
Optimize marketing strategies: It aids in the management of promotion initiatives by ensuring that the proper customer niche is targeted and maintained. Companies can target harnessing good and loyal customers, as a result reducing the amount of energy needed to acquire them.
Reduce customer acquisition cost: Customer Lifetime Value helps cut the cost of acquiring customers since the focus is on keeping the already acquired customers. It is always cheaper to keep the existing customers rather than to continue hunting for new ones.
Improved financial forecasting: It helps in improving sales forecasting by assisting in a precise approximate way of the future sales from a certain customer. It assists companies in making better decisions when it comes to their investments and the kind of expansion that they should engage in.
Prioritize customer satisfaction: This is an area that urges the provision of efficient customer service and satisfaction. It is, therefore, vital for every business to ensure they retain customers as much as possible in order to enhance their worth to the business.
Differentiates from competitors: This helps the business to set itself apart from the rest of the organizations by customizing its value delivery systems to what is important to its most important clients.
2. Distinguishing CLV from other business metrics
In many cases, we have noticed that people tend to confuse customer lifetime value with other business metrics like customer satisfaction. Let’s distinguish CLV from these metrics:
CLV vs. Net Promoter Score (NPS):
- While NPS indicates customer loyalty and willingness to recommend the product to others, CLV goes as far as giving the monetary value of the same customer to the business throughout their lifetime.
- Whereas NPS can be used as the approximation of future revenue, CLV refers to the sum of revenues and profits received from a specific customer.
CLV vs. Customer Satisfaction (CSAT):
- CSAT focuses on the customer’s level of satisfaction with a single encounter or as an individual product. On the other hand, CLV is based on the total value that a consumer brings to the company in the future.
- CSAT is more confined to the immediate customer experience and sales, while CLV is a holistic view that focuses on the customer and lifetime sales.
CLV vs. Customer Acquisition Cost (CAC):
- CAC defines the amount of money required to obtain a new customer, while CLV predicts the total amount and profit that the customer will spend at the company throughout the lifetime of his/her patronage.
- CLV is also useful in knowing whether the costs incurred when acquiring a new customer (CAC) will be worth it in the end.
CLV Importance
By now, you have gained basic knowledge about customer lifetime value and how it is associated with the business. Let’s also learn about its importance:
1. Improved Customer Segmentation
CLV assists in the segmentation of the customer base by the level of profitability, it also assists businesses in prioritizing marketing and products depending on higher-value customers.
User research and insights offered by Nudge help to create a proper customer segmentation based on consumer behavior and preferences. We also have integrations with analytics platforms like Mixpanel and Amplitude from where you can bring in the data and segment and run experiments for various cohorts.
2. Enhanced Marketing Strategies
An in-depth understanding of CLV helps you to recognize the significance of varying customer values in different businesses. It shows how marketers could optimally allocate marketing risk and budget for the acquisition and retention of specific customers.
3. Better Resource Allocation
CLV is a useful tool for examining the long-term value of customers and enables business organizations to invest in the products, experiences, and customer service that generate the highest profit. Nudge can help you get the best-required sources for your business with features like personalized user journeys.
4. Increased Customer Retention
Understanding the CLV motivates companies to spend on retention initiatives that help lengthen the relationship and generate more profits. For example, initiatives like forwarding personalized messages and mail campaigns to clients. Nudge offers some of the best fun engagement activities to engage your customers like point system, streaks, stories, casual games, polls, quizzes, and more.
5. Informed Business Decisions
CLV can be very helpful in reporting meaningful data and insights to help managers and businesses make sound decisions about prices, products, and even customer services.
6. Enhanced Customer Relationships
CLV’s prominence of customers establishes a competitive strategy that endeavors to develop better and deeper bonds with its customers than its competitors and, in doing so, increases customer happiness and commitment.
7. Maximized Revenue
High-CLV customers are valuable targets of focused marketing strategies owing to their increased potential of making further purchases, hence the right target for upselling, cross-selling, and repeat sales, which foster the continued growth and profitability of the businesses.
Nudge offers a combination of high-tech modules that can help you maximize revenue. These include surveys, gamification, and rewards.
8. Cost Efficiency
CLV is also useful in minimizing customer acquisition costs as it emphasizes the value that is there in maintaining loyal customers because compared to the cost of acquiring these individuals, they are cheaper.
9. Competitive Advantage
Large amounts of value can be unlocked by organizations that manage CLV well because they are able to deliver better customer experiences, and innovative propositions and engage more selectively in ‘bet the farm’ investing for highly attractive value segments.
10. Long-Term Business Growth
The concept of CLV provides guidance against the background of interacting with clients, and it is this guidance that makes a business not only focus on short-term profits but also invest in customer relationships for long-term growth.
Calculating Customer Lifetime Value
Customer Lifetime Value calculation is not a simplistic process that requires only the definition of a single equation. Rather it combines a few equations to define an approximation of the amount of revenue that a business can expect from a certain customer for the entire duration of their using the products or services of that business.
1. Basic CLV formula
The basic formula for lifetime value calculation is:
CLV = (Customer Revenue per Year) × (Duration of the Relationship in Years) − (Total Costs of Acquiring and Serving the Customer)
There is a more detailed traditional lifetime value calculation formula available. It is for businesses with changing customer revenues. Here is the formula:
CLV= 1 + Retention Rate − Discount Rate / Gross Margin per Customer Lifespan
- Gross Margin per Customer Lifespan (GML): The profit expected over the average customer lifespan, calculated by subtracting costs from revenue.
- Retention Rate: The percentage of customers who stay with the business over a set time period.
- Discount Rate: A percentage to account for inflation, typically set at 10%.
2. Examples
Simple Calculation
- Profit generated by the customer each year: $1,000
- Number of years that they are a customer: 5 years
- Cost to acquire the customer: $2,000
Now the lifetime value calculation goes like:
- Annual profit contribution per customer: $1,000
- Average number of years that they remain a customer: 5 years
- Less the initial cost of customer acquisition: $2,000
CLV: $1,000 x 5 - $2,000 = $3,000
Detailed Calculation
- Annual revenue per average customer: $2,000
- Product costs associated with the average customer’s purchases: $500 per year
- Costs to provide customer service: $100 per year
- Annual retention rate: 80%
- Cost to acquire a new customer: $1,000
Now the lifetime value calculation goes like:
- Average annual profit per customer: $2,000 - $500 - $100 = $1,400
- Average customer lifetime: 5 years (calculated from the retention rate)
CLV: £1,400 x 5 - £1,000 = £6,000
Traditional Calculation
- Gross margin per customer lifespan: $2,200
- Retention rate: 70%
- Discount rate: 10%
Now the lifetime value calculation goes like:
GML / (1 + 0.70 - 0.1) = $2,200 / 0.4 = $5,500
3. Customer Lifetime Value Calculation by Customer Segment
Realizing that not all customers are equal, businesses can calculate the CLV By segment in which they determine that customers with the highest value are catered for appropriately.
Predictive Model
To assess and forecast customer lifetime value for any business there is a model that can be used, a predictive model. This model predicts further lifetime value embedded by spending actions of new and existing customers through machine learning and regression analysis.
Historical Model
The historical model utilizes previous data to determine the likely value of the customers in the future but disregards the fact that some of the current customers may not patronize the business in the future. This model proves beneficial for those business organizations that experience a constant stream of customers in their business.
Factors Influencing CLV
By understanding and optimizing these factors, businesses can enhance their Customer Lifetime Value, leading to sustained growth and profitability.
1. Average Purchase Value (APV)
The frequency of the customer’s purchases in terms of how frequently he spends money in a company contributes to CLV. Purchases at higher dollar amounts tend to deliver a better CLV.
2. Purchase Frequency (PF)
It’s the measure of how often a given customer is likely to make a purchase within a given period of usually one year. Frequent purchases increase CLV.
3. Customer Lifespan (CL)
The number of years during which the customer has a contract with the company. Loyalty is another factor that directly impacts a customer’s CLV, as long-lived relations are usually of great benefit.
4. Gross Margin (GM)
The profit or revenue that is left to the merchant after all the costs of merchandise, or cost of goods sold have been subtracted. This is because significant gross margins enable CLV to accumulate more value for consumers as indicated in the following equation;.
5. Retention Rate (RR)
It measures the proportion of customers who are repeat customers, that is, those who make purchases at a given store over time. The longer the customer remains, the higher his CLV, because more products are bought in a given period and the more often the products are bought, the longer the relationship becomes.
6. Customer Acquisition Cost (CAC)
Another restriction concerns the cost of gaining a new customer or client, as it is commonly called. CLV is enhanced when the costs of acquiring a customer are significantly lower than the overall revenues that are likely to accrue from the customer relationship.
7. Customer Satisfaction and Loyalty
Satisfied customers are likely to remain loyal and even refer their peers to the business, ensuring that their frequency of purchase is high, hence the long lifespan of a client.
8. Product Quality and Service
Poor quality goods and poor service from the personnel diminish the chances of customers coming back for more goods, thereby lessening the amount of business.
9. Personalization and Customer Experience
Targeted advertising and positive customer experiences create customer loyalty, which in turn increases their buying frequency and lifespan.
10. Cross-Selling and Upselling
It is also more beneficial to sell related goods or services to the same customers since the sales per customer may be upsized, which will translate to more total sales.
Strategies to Increase CLV
To properly maintain a good customer lifetime value for your business, it is important to learn about the key strategies. These strategies not only help you to sustain growth but also increase profitability and a loyal customer base. Here are some of the strategies:
1. Enhance Customer Onboarding
It is believed that a smooth, step-by-step product/service input enables clients to appreciate its value and, hence, improves customer satisfaction and advocacy. Nudge makes sign-up easy and guides new users to their "aha moment" quickly, using native onboarding tours, walkthroughs, and checklists.
2. Deliver Exceptional Customer Service
Stating the order processing time and being polite and welcoming to the clients can foster customer satisfaction and hence boost the chances of re-ordering.
3. Implement Loyalty Programs
It is important for an organization to issue points, discounts, or special coupons to loyal customers in order to persuade them to continue to purchase from the particular organization.
Nudge can help you implement a scoring system to reward users for completing tasks and connect it to a weekly or monthly leaderboard, along with badges that can be unlocked based on user activity.
4. Personalize Customer Interactions
Introduce a system of segmenting and targeting customers and adapt products according to customer needs over time so as to create an environment in which customers feel appreciated.
5. Regular Communication
Staying in touch with consumers by directly sending newsletters, and e-mails, and having links on popular social sites for new products and services and offers.
6. Upsell and Cross-Sell
Show customers similar or more expensive products that may interest them or help them get more from their initial purchase that they made physically or virtually.
7. Offer Subscription Services
Traditional service models can offer a more stable revenue base since customers continue to be in contact with your brand over an extended period, typically paying a monthly subscription fee.
8. Solicit and Act on Customer Feedback
If customer feedback cannot be solicited regularly, then at least customers should be encouraged to report any defects they encounter, and the feedback received should be acted upon in the shortest time possible. From the customers, find out what they would like to change and implement them, proving to the customers that their opinions matter.
Nudge offers in-app surveys with which you will be able to drive metrics like user behavior. Gain actionable insights into user preferences and experiences.
9. Enhance Product Quality
The ability to constantly better serve your customers through the quality of your product offering can lead to greater overall satisfaction amongst your consumers.
10. Streamline the Purchase Process
Ensure that your website has a clear roadmap that customers can follow, quick check-out options as well as various forms of payment to ensure minimal customer drop-off.
11. Engage in Content Marketing
Blogging, sharing videos, and being active on social media accounts are the best ways to deliver interesting and relevant content to customers and to become a part of their lives.
12. Leverage Customer Data
The key advantage of using data analytics in customer-oriented marketing is that it enables you to analyze the customers’ behavior and demand and create marketing strategies as well as product offers that address those behaviors and demands.
13. Offer Excellent After-Sales Support
Providing support after the sale, such as easy returns, warranties, and customer service, can boost customer confidence and loyalty.
14. Create a Community
Foster a sense of community around your brand through forums, social media groups, and events where customers can interact and share experiences.
15. Provide Exclusive Access and Early Releases
Reward loyal customers with early access to new products, special events, or exclusive deals, making them feel appreciated and valued.
Conclusion
"Do what you do so well that they will want to see it again and bring their friends."
- Walt Disney
Now that we understand the value of customers and their importance to your business let’s sum it up!
Customer Lifetime Value calculation is vital when it comes to determining the economic value of a customer as well as possible business strategies. The CLV provides valuable insight into when the customer is likely to buy products and services, how the marketing initiatives impact the acquired customers, and how the business should spend its resources.
Bringing the four key values of CLV into action, target marketing, and frequent buying promotions, for instance, helps to lock in customers in the long run and generate more sales. Integrate CLV concepts into decision-making and management in order to enable increased business outcomes at the micro and macro levels to sustain business into the future in the current unprecedented market competition.
Therefore, keeping each customer’s value in mind allows for new forms of growth with the client base so valued. Intuitive user experiences help in increasing customer lifetime value. Book a demo with us today to see how we can help you!