What is Customer Lifetime Value? How to measure it?

Understanding and optimizing customer relationships are key to success in the dynamic business world. Customer Lifetime Value (CLV) is a helpful metric that helps businesses gauge the long-term value of their customers.

In this comprehensive guide, we will discuss the concept of Customer Lifetime Value, its calculation, and its significance in driving informed business decisions. Let’s start with understanding ‘what is customer lifetime value’.

What is Customer Lifetime Value?

Customer Lifetime Value (CLV) is the estimated net profit a company can expect to generate from a customer throughout their relationship. It considers the customer's revenue, deducts the cost of acquiring and servicing the customer, and considers the customer's lifespan with the company.

CLV allows businesses to identify their most valuable customers, predict future revenues, and optimize marketing and retention strategies.

Benefits of calculating Customer Lifetime Value

Understanding the customer lifetime value calculation offers several benefits to businesses:

Utilizing CLV Measurements for Strategic Customer Prioritization

Measuring Customer Lifetime Value (CLV) offers a strategic advantage by shedding light on where your customer-centric efforts should be concentrated. CLV analysis can unveil disproportionate sales efforts allocated to leads and existing customers. By comprehending the varying values of different customer accounts, you can segment and prioritize the most valuable ones, optimizing your sales team's allocation of time and resources.

For instance, consider Customer A with a $100,000 CLV and Customer B with a $1 million CLV. Armed with this insight, your customer success department can make informed decisions to channel more resources into nurturing and retaining high-value customers.

CLV as a Revelation for Underdeveloped Accounts

Measuring CLV can serve as a revelation in account management. What might initially appear as a mediocre account can, upon CLV calculation, reveal itself as significantly underdeveloped, harbouring untapped potential beyond your team's initial assessment.

Take, for example, Customer A, with only a few sporadic, small-batch sales. This customer may have flown under the radar, making minimal impact on the sales department's radar. However, once you compute the customer’s full potential over the expected relationship duration, it may emerge as one of the top 20% of your business's accounts. Armed with this newfound insight, you can strategically reconsider the account's development approach.

CLV as a Tool for Long-Term Planning

Leveraging CLV's predictive capabilities empowers you to tap into a company's market potential based on its existing accounts. This approach provides a comprehensive, multi-dimensional view of the company's growth possibilities.

Consider various strategies, such as calculating CLV for your entire customer base and strategic accounts, as well as segment markets by region. This data becomes invaluable in decision-making processes, especially when a customer's short-term value might be insufficient or potentially misleading. CLV allows you to make more informed, forward-looking decisions, paving the way for long-term planning and sustainable growth.

How to Calculate Customer Lifetime Value?

This formula requires two metrics:

Customer Value

Customer Value is calculated by multiplying the average purchase value by the average purchase frequency rate

Average Customer Lifespan

Calculated by averaging the time between the first time a customer bought something and the most recent time they bought something.

Or, you can use a more complicated formula that will give you a more accurate result. This formula is:

Below are a few metrics that are needed for this CLV formula:

Average Purchase Value

The average purchase value is calculated by dividing your company’s total revenue within a single period (let’s say in one year) by the number of purchases customers make throughout the year.

Average Purchase Frequency

Average purchase frequency is calculated by dividing the number of purchases in the period by the number of unique customers who made purchases during that period.

Average Gross Margin

The average gross margin is calculated by subtracting the cost of an average sale from the revenue gained from an average sale.

Strategies To Improve Customer Lifetime Value

To improve Customer Lifetime Value, businesses can adopt several strategies:

1. Enhance Your Onboarding

Experience Customer onboarding is the essential process of acquainting your customers with your product's purpose, significance, and reasons for their continued engagement. An effective onboarding experience is instrumental in enabling customers to derive value from your product.

2. Elevate Average Customer Value

Boosting your Customer average value is a strategic move. Continuously monitor your customers' usage patterns and identify opportunities for additional features or services that align with their needs. During renewal periods, proactively recommend upgrades tailored to their requirements.

3. Foster Long-Term Customer

Bonds Long-lasting customer relationships are rooted in trust. When customers perceive your product as valuable and instrumental in their personal and business growth, they are more inclined to remain loyal to your brand.

4. Embrace Valuable Customer Feedback

Listening can be more impactful than speaking. Customers often offer valuable insights on ways to enhance your business practices to better meet their needs. This not only makes them feel valued but also contributes to their overall satisfaction.

5. Empower Consistent Engagement

Establishing a robust engagement strategy is crucial. Staying connected with your customers and anticipating their needs before they articulate them is pivotal to ensuring customer satisfaction.

6. Elevate Your Customer Service

A staggering 90% of Americans consider customer service a key factor when selecting companies to do business with. Thus, to enhance your Customer Lifetime Value, dedicate efforts to refining your customer service and continuously seek opportunities for excellence.

Conclusion

Now that you know “what is customer lifetime value”, you might have also understood how helpful this can be for businesses to assess the long-term value of their customers and make informed decisions.

By understanding the components of CLV and adopting strategies to enhance it, companies can build lasting customer relationships, drive profitability, and achieve sustainable success in the competitive marketplace.

Zapscale, a leading customer success platform, plays a crucial role in this process by providing valuable data and key performance indicators (KPIs) to help businesses improve their customer lifetime value. By leveraging the insights provided by Zapscale, companies can gain a deeper understanding of customer behavior, preferences, and interactions throughout their lifecycle.