Customer lifetime value (CLV) is a key performance indicator that many businesses simply don’t take into consideration when looking at customer engagement and revenue trends. But it is one of the most important statistics to track in your business. It is directly linked to revenue and provides a clear metric to look at when examining the long term relationship you have with a customer.
CLV measures the value a customer provides to your business over the lifetime of their relationship with you. It is the average amount of money your customer will spend with you minus what you spent to acquire them and to deliver your product or service.
“The higher the number, the higher your profits.”
CLV reveals many different things about your business.
- Your top clients and what is working well for them
- Helps determine if your customer acquisition costs make sense
- Shows where you may be able to lower the cost to acquire a customer
- Opportunities to build out your product or service offerings to further compliment what is already providing good value for your clients
- Where to make improvements to whom you target and what you offer them
- Changes in how you communicate with prospects and customers
Calculating Customer Lifetime Value
CLV takes into account three key factors:
Customer Acquisition Cost (CAC) is the cost to go out and find a new customer. This is a one-off expense because once you’ve acquired them there are no further acquisition costs. Since this directly affects the customer lifetime value, it’s an important number to take into account when calculating CLV. It generally costs less to keep an existing customer than to go out and find a new one because you don’t have the same acquisition costs. Existing customers also skip many of the steps in the buyer’s journey making it easier to upsell them. Finding ways to lower your acquisition costs will help raise your CLV.
Cost to Serve is the cost to deliver your product or service. This may be higher in the first year, or during implementations, or times in a project with larger deliverables. It can vary by customer and it is worth examining whether you are spending more to serve your otherwise high CLV customers.
Customer Churn rate measures the number of customers who end their relationship with you. This number can signal when things are working well (the number goes down) or when things are not working well and need a change (number goes up).
Key Performance Indicators (KPIs) that determine your CLV
- Profit per Customer (PC)– annual revenue minus costs to deliver products/services
- Customer Lifetime (CL) – number of years they are a customer
- Customer acquisition costs (CAC) – the cost to acquire the customer
Formula
PC X CL – CAC = CLV
CLV lets you see how changes in each of these KPIs affects your business. It also means that when you improve any of these KPIs your CLV will increase.
Profit generated by the customer each year X number of years they are a customer – customer acquisition costs.
How to improve your CLV
“Following the data behind your CLV enables you to enact changes and improvements to increase it over time.”
It becomes a valuable tool for locating areas that need improvement. Here are some ways you can use the data to improve your CLV.
Focus on the customer experience
The biggest indicator of whether or not an existing customer will buy from you again is their customer experience. Focusing on improving all aspects of the customer experience helps increase customer satisfaction and improve customer retention, reducing your churn rate. These satisfied customers are more likely to purchase additional services or products, increasing their CLV by bringing in additional revenue without additional acquisition costs. Building positive long-term relationships with your customers helps increase CLV.
Target your most valuable customers
Calculating CLV by customer type enables you to further segment your customers and identify the top customers with high CLVs – those who are getting the most value from your services while also providing the most value for your business. That data helps you tailor your marketing to provide better and more targeted personalization to further upsell those top customers.
Learning more about your top customers also makes it possible to determine what sorts of prospects you need to target in the future, so you can continue to add to your roster of satisfied top customers.
Regularly tracking CLV over time and examining how each of the KPIs affects it provides you with a clear picture of what is driving both customer spend and customer loyalty. It also shows how those behaviors affect your overall revenue. It’s a powerful tool to drive higher customer satisfaction and increased engagement.
All the best,
JP Clement
CEO
