How to Calculate, Estimate and Increase Customer Lifetime Value
Here’s the short of it: if your sales team doesn’t know how to calculate customer lifetime value (or if they just aren’t doing it), you’re missing a huge opportunity to understand business performance and optimize your customer relationships. Customer lifetime value tells the true story of how well your company is serving customers by taking a long-term view of value.
Companies who do know and leverage strategies to increase customer lifetime value see better retention rates, higher sales ROI, and ultimately higher revenue.
In this article, we’ll walk you through how to calculate this important metric and 5 ways you can increase customer lifetime value for better business results.
Quick Takeaways
- Customer lifetime value enables businesses to identify their most profitable customer segments and pursue them to earn higher revenue.
- Calculating customer lifetime value requires four other formulas: average purchase value, average purchase frequency, customer value, and average customer lifespan.
- Optimizing customer onboarding and support processes are two of the most impactful ways to increase customer value.
- Providing high-value content keeps current customers more engaged.
- Companies can use customer feedback to continually improve and increase customer lifetime value.
What is customer lifetime value and why is it important?
Customer lifetime value (CLV) is a metric that helps businesses determine the total revenue they can expect to earn from a customer throughout the lifespan of their business relationship.
Businesses today use customer lifetime value as a strategic tool for refining their ideal customer profiles, finding the most profitable customer segments, and increasing the lifespan of their current customers.
All of this, of course, ultimately results in higher revenue for your company.
Customer lifetime value is widely considered to be one of the most valuable metrics businesses can understand because it paints an honest picture of the customer relationship that accounts for long-term value. Still, a recent survey found that while 93% of organizations said they measured CLV, almost 70% thought they could be doing a better job.
It’s crucial that companies prioritize and optimize their processes for measuring and leveraging CLV because those that do experience enormous benefits:
In the next two sections, we’ll walk step-by-step through how you can calculate your customer lifetime value and then cover 5 ways you can increase it for better business results.
How do you calculate customer lifetime value?
You can calculate customer value at an organizational level to determine the average value of all of your customers, or you can calculate it by specific customer segment (or both). In order to do it, you’ll first need to understand four other formulas:
Average purchase value
Average purchase value determines the average dollar value for one individual customer purchase from your company. To calculate it, take the total value of all customer purchases over a specific time period and divide it by the number of purchases that occurred during that time.
Average purchase frequency
This number determines how frequently, on average, an individual customer purchases from your company during a particular time period. To calculate it, divide the number of purchases made during a specific time period by the number of unique customers who made purchases.
Customer value
Customer value is a simple calculation used to determine the value of an individual customer during a specific period of time. It doesn’t take into account the same long-term variables that customer lifetime value does, but it is a stepping stone formula for determining customer lifetime value. It can also be useful for companies whose customer lifespan is typically fixed or short. To calculate customer value, take the average purchase frequency multiplied by the average purchase value.
Average customer lifespan
Finally, you’ll need to know the average amount of time a customer continues to purchase from your company. To calculate it, take the sum of your customers’ lifespans and divide it by the total number of customers.
Customer Lifetime Value
Once you’ve calculated the four formulas above, you can determine your customer lifetime value. To do it, take customer value and multiply it by your average customer lifespan.
5 ways to increase customer lifetime value
Pursue the right customer segments
Knowing your customer lifetime value is only as valuable to your company as you make it. One of the ways you can make your CLV findings most actionable is to drill down into your data to find the highest-value customer segments (i.e. the customers making the most purchases and remaining with your company for the longest amount of time).
Then, adjust your marketing and sales approaches to pursue these highest-value segments. Not only will your customer lifetime value increase over the long term, you’ll also see a shorter sales cycle, better internal efficiency, and higher conversions because you’re pursuing the right customers.
Optimize your onboarding process
Onboarding is the first step to long-term customer success. It sets customer expectations and serves as the official beginning of your business relationship. In other words — don’t overlook it! If you’re not convinced, consider this: 86% of B2B customers report they would stay more loyal to a company that invests in onboarding, but 93% said that the companies they buy from could do better in this area.
This is a huge miss! Start strong with your customer relationships by providing an intentional, welcoming, valuable onboarding process that sets them in the right direction for success.
Provide omnichannel customer support
Technology has expanded our customer interactions to encompass multiple physical and digital channels, and customers today expect that companies will provide strong support across all of them. Not only this, they expect these channels to be integrated for an omnichannel experience that seamlessly threads together their data, preferences, and history.
Today, 66% of customers use multiple channels (2-3 on average) to contact customer support, and they don’t want to start over every time. Optimizing your internal processes and using a software solution to keep your customer interactions documented and centralized is crucial for building long-lasting customer relationships.
Start a loyalty program
Did you know that pursuing new customers can be 5 to 25 times more expensive than retaining existing ones? Your current customer base is one of your most important audiences, and it’s important not to overlook them just because they’ve already made a purchase. Providing exceptional benefits to your most loyal customers and even starting a formal customer loyalty program can help you maximize their customer lifetime value.
Stay engaged with high-value content
A strong content marketing strategy has become a necessity for companies across businesses to stay visible to their audience and attract new customers. But it’s also a valuable tool for maintaining strong relationships with current customers and keeping them happy and engaged.
One of the best ways to do this is with strong email marketing campaigns that provide ongoing educational content, build community, and emphasize the value of your solutions.
Collect and leverage feedback
Your current customers have the most valuable and accurate insight into how the customer experience could be improved. Are you asking them for their feedback? If not, it’s time to start! You can collect customer feedback through several simple methods like periodic check-in meetings or customer feedback surveys. Once you start collecting customer feedback data, use it to find commonly mentioned areas for improvement and other trends.
Our outbound email software and lead generation services are custom-built for startups, consultancies, marketing agencies, and other B2B organizations. Schedule a quick call with us and find out how we can help you win more clients.