Table of Contents
- Introduction
- What is Customer Lifetime Value (CLV)?
- Why is Customer Lifetime Value Important?
- Examples
- Steps to Measure Customer Lifetime Value
- Improving Customer Lifetime Value
- How to measure customer lifetime value CLV
- The Benefit of Customer Lifetime Value
- Conclusion
Introduction
In today’s competitive business landscape, knowing how to measure CLV can be a game-changer, enabling you to make informed decisions and drive sustainable growth.
Customer Lifetime Value, often referred to as CLV or LTV (Lifetime Value), is a fundamental concept in marketing and business strategy. It represents the total value a customer brings to your business throughout their entire relationship with your company. In essence, CLV quantifies the net profit generated by a customer over their lifetime as they engage with your products or services.
Measuring CLV involves a combination of data analysis and predictive modeling. By analyzing customer behavior, purchase patterns, and interactions with your brand, you can gain valuable insights into the long-term impact of your marketing efforts and customer retention strategies.
In this comprehensive guide, we will explore the essence of Customer Lifetime Value, its significance for businesses of all sizes, and the methodologies used to measure it accurately. From understanding the factors that influence CLV to leveraging customer segmentation for deeper insights, we’ll equip you with the knowledge and tools you need to make CLV a cornerstone of your business strategy.
Are you ready to unlock the secrets of Customer Lifetime Value and transform the way you perceive and engage with your customers? Let’s dive in together and discover the true worth of your customer relationships as we embark on a journey to harness the power of CLV for sustained business success. Let’s get started!
What is Customer Lifetime Value?
Customer lifetime value (CLV) is an indicator of the amount of revenue a company can reasonably expect from a single customer account all through the business relationship.
According to HBR, acquiring a new customer can cost 5 times more than retaining an existing customer. Increasing customer retention by 5% can increase profits from 25-95%.
Companies use customer lifetime value to determine the customer base that is usually the most valuable to the company. The longer customers continue to purchase from the company, the greater their lifetime value.
By measuring CLV in terms of Customer Acquisition Costs (CAC), companies can measure how long it takes to recover the investment needed to earn new clients.
Key Statistics of Customer Lifetime Value
- 76% of companies see CLV as an important concept for their organization
- 84% of companies that work to improve their customer experience report an increase in their revenue
- 96% of customers say customer service is important in their choice of loyalty to a brand
- 83% of companies that believe it’s important to make customers happy also experience growing revenue
- 81% of companies view customer experience as a competitive differentiator.
Why is Customer Lifetime Value Important?
- It directly affects your Revenue
CLV identifies specific customers who contribute the most revenue to your business. This allows you to provide these existing customers with the products/services they like and make them happier, thus allowing them to spend more money on your company.
- Improves Customer Loyalty and Retention
When a company optimizes its CLV and regularly delivers value through a high level of customer support, products, or loyalty programs, it tends to increase customer loyalty and retention.
The more loyal customers, the lower the churn rate, and the increased referrals, positive reviews and sales
- Helps you Identify the Right Customers
If you know the value of your customers lives, you also know how much they have spent on your business over a period of time—whether it’s $50, $500, or $5,000. Armed with this information, you can develop customer targeting strategies for the customers who make the most of your business.
- Reduces Customer Acquisition Costs
Finding new customers can be very expensive. In fact, an article published by Harvard Business Review found that the cost of purchasing a customer is 5 to 25 times higher than that of retaining existing customers.
In addition, another study conducted by Bain & Company found that a 5% increase in retention rate can lead to a 25% to 95% increase in profits.
Examples of Companies improving CLV
The best way to understand CLV is through examples. Here are some examples from some companies to better illustrate how the value of a customer’s lifetime affects your business:
Amazon Prime Customer
Ecommerce giant Amazon may do its best to please every customer, but there’s one customer segment it pays extra attention to: Prime members. No, it’s not just because Prime members pay for fast shipping and free returns. It’s because Prime members spend $1,340 annually – more than twice as much as non-Prime members.
Factoring in the average amount of time Prime members stay with Amazon, the customer lifetime value of a Prime member is $2,283 compared to $916 for non-Prime members. Knowing this, Amazon can redouble its efforts to retain existing Prime members and convert new customers to Prime.
Netflix
According to the Netflix value indicator, the average subscriber will stay for 25 months. According to them, the lifetime value of a Netflix customer is $ 291.25. This number is important because it helps Netflix determine how much money they can spend on customers.
Nike
Nike focuses on the four main value propositions of its customers: accessibility, innovation, customization, and product / status. Its value for customer life touches the skies as it provides customers with Loyalty and membership programs. Nike has made great efforts to establish its brand and brand status. It often collaborates with top artists and sports stars to promote its brand and drive the demand for the product.
Intuit
At Intuit, they use a process called “service delivery” to provide customers with customized / dedicated services, laying the foundation for a smooth and satisfying customer experience.
Personalization accurately summarizes access to the right customer base through the right channel at the right time, which has a positive impact on Intuit’s customer engagement index.
Salesforce / Pardot
B2B companies are always looking to improve their marketing and sales efforts. According to Salesforce Pardot’s customer relations study, the efficiency of customers using Pardot has increased by 48%, sales revenue has increased by 34%, customer engagement is likely to increase by 38%, and the effectiveness of marketing campaigns has increased by 37%.
How to measure customer lifetime value CLV
Improving Customer Lifetime Value
Optimize your Onboarding Process
Customer onboarding is one of the first communications your audience has with your brand after they decide to become a customer. This is also your first opportunity to impress them.
Therefore, unless you want to lose customers in the first week, you need to optimize your onboarding process to make these customers familiar with your products.
Underpromise, but over-delivery
You can increase the lifetime value of your customers by over-fulfilling your brand promises.
Many brands have already made bold statements that will not satisfy you, so when they come across a product that over-fulfills its promises, this is a surprise to customers.
Increase your average order value
One of the smartest ways to increase CLV is to increase the average order value.
You can provide compitable customer related products to buy when they are about to check out.
Brands such as Amazon and McDonald’s are examples of companies that make good use of up-selling and cross-selling methods. Amazon will provide you with related products and combine them at a group price.
Benefits of Customer Lifetime Value
- Customer lifetime value is a very useful indicator. It will tell you which customers spend the most on your business and which customers will remain loyal to you for the longest period of time
- Using the formulas and models provided above, immediately start calculating CLTV for your business.
Conclusion
The value of a customer’s life can help you find balance.
You can calculate how much you need to invest to retain existing customers and gain new customers.
You will learn how to build customer loyalty and increase sales from CLV surveys. If you make your customers happy, they will last longer and continue to buy from you.
By simply counting CLV, you can improve your business in all aspects
Deepak Wadhwani has over 20 years experience in software/wireless technologies. He has worked with Fortune 500 companies including Intuit, ESRI, Qualcomm, Sprint, Verizon, Vodafone, Nortel, Microsoft and Oracle in over 60 countries. Deepak has worked on Internet marketing projects in San Diego, Los Angeles, Orange Country, Denver, Nashville, Kansas City, New York, San Francisco and Huntsville. Deepak has been a founder of technology Startups for one of the first Cityguides, yellow pages online and web based enterprise solutions. He is an internet marketing and technology expert & co-founder for a San Diego Internet marketing company.
