Imagine being able look into the future to see which customers will spend more with your company over the course of one, three or five years. Armed with this knowledge, you’d likely allocate significant resources to ensure these customers remain satisfied. Gaining this valuable insight doesn’t require time travel or mind reading, but a calculation known as Customer Lifetime Value.
While you’re likely already measuring NPS and CAST, which are important indicators, they shed light on the somewhat intangible promises of loyalty and satisfaction. Because CLV, on the other hand, is directly tied to revenue, it can effectively drive growth.
What is Customer Lifetime Value?
CLV indicates the total revenue a business can reasonably expect from a single customer by considering a customer’s revenue value compared to the company’s predicted customer lifespan. The longer a customer continues to purchase from a company, the greater his or her lifetime value becomes. CLV is then used to identify customer segments that are most valuable and helps to understand a reasonable cost per acquisition.
Why CLV Matters
Research explains why it literally pays to understand your CLV:
- It can cost up to FIVE TIMES MORE to acquire a new customer than retain an existing one.
- Increasing customer retention by just 5 percent can significantly increase profits.
- The success rate of selling to a customer you already have is much greater than the success rate of selling to a new customer.
By identifying and nurturing your most valuable customers, you gain more total revenue resulting in an increase in CLV. Furthermore, CLV allows you to determine a long-term vision in terms of how valuable a customer can be when retained over time.
How to Calculate Customer Lifetime Value
At its simplest, CLV is customer revenue minus the costs of acquiring and serving the customer.
- Calculate the average purchase value by dividing your company’s total revenue over one year by the number of purchases during that same time.
- Calculate average purchase frequency rate by dividing the number of purchases over one year by the number of unique customers who made purchases during that time.
- Calculate customer value by multiplying the average purchase value by the average purchase frequency rate.
- Calculate average customer lifespan by averaging the number of years a customer continues purchasing from your company.
- Calculate CLV by multiplying customer value by the average customer lifespan. This is an estimate of how much revenue you can expect an average customer to generate for your company over the course of their relationship with you.
Real World Example
CLV is especially insightful for companies that have multi-year relationships with customers such as a television or mobile phone subscription. OptimumCX recently helped a client leverage CLV through a retentions program focused on callers who wanted to cancel their subscriptions. While the program cost $3,900 per group, it successfully retained clients totaling $12,000/month, or $144,000 annually. The ROI is clear; by understanding CLV, the company increased revenue that would have otherwise been lost.
You can directly influence CLV by promoting loyalty throughout the customer’s journey. OptimumCX can helps clients understand the key driver of CLV by evaluating customer experience and measuring feedback at all key touchpoints. Click here for more information on how you can use this powerful indicator to drive business growth.