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04/23/2022

What Is Customer Lifetime Value?

Customer Lifetime Value (CLV) is an estimate. But this estimate makes your revenue forecasts more reliable and your business more profitable. From this article, you'll see how CLV can help your company and which factors impact this parameter. Also, you'll learn how to calculate customer lifetime value and check ways to grow this number.

Belkins Answers on What Is Customer Lifetime Value

Here's our customer lifetime value definition:

CLV is the revenue you expect to get from one customer as long as this person remains your client.

So, each pizza you order from Domino's grows your CLV for this brand. And the longer you prefer Domino's, the greater revenue (or value) it'll get. You'll learn all the aspects of this metric and answer the "What is Customer Lifetime Value?" question. These aspects include:

  • Factors that influence customer lifetime value.
  • Ways to improve your digital marketing with CLV.
  • Revenue generation using the customer value indicator.
  • Methods to grow the lifetime value of your customer.

But before diving into how to calculate CLV and improve customer retention using digital marketing trends, let's check the key terms and formulas. 

How to Calculate Customer Lifetime Value

Different industries face specific challenges when forecasting sales to their typical customer. For example, a subscription-based SaaS company will multiply the monthly fee by the average customer lifespan (number of months). Pizza sellers will consider the frequency of orders or visits, the average bill, and the customer lifetime. And now, let's jump to calculations.

The classic customer lifetime value formula looks like this: you multiply the Customer Value by the Average Customer Lifespan. In other words, you multiply the revenue a client generates in one period by the number of such periods. So, if you buy one Ultimate Pepperoni Feast for $20 weekly, your monthly Customer Value will be $80. 

Customer Lifetime Value Formula

Say your pizzeria expects you to stick to this schedule for another twelve months. Then their total revenue received from you will be $960. However, there are no ideal input parameters, and tracking each purchase is challenging. So, in real life, analysts will have to average the numbers. No worries, there's nothing but 3rd-grade math.

Customer Value

Remember that your Customer Value is the multiple of two averages. The first is the Average Purchase Value, and the second is the Average Purchase Frequency Rate. When you divide the total revenue for a period by the total number of purchases, you get the revenue an average order brings. This number shows how much a pizza lover pays during one visit. 

Dividing the number of purchases made for the period by the number of unique customers who paid for your products, you get the frequency of an average purchase. This number says how often a pizza eater comes to Domino's. Now let's switch to the denominator of the Customer Lifetime Value formula. 

Customer Value Formula

Let’s come back to our example. Your pizza purchase frequency equals 48 (1/week * 4 weeks * 12 months) per year. And since your average order value (one Pepperoni) costs $20, the total revenue is precisely $960. 

Average Customer Lifespan

The lifetime of a client is the number of days, weeks, months, or years between the first and the last purchase this person makes in your company. And you'll need to add these periods for all the customers who stay with you within the reporting period. Then you divide this sum by the number of customers. 

Now, let's assume you have 5 clients and calculate the average customer lifespan for a year. The first two customers have been with you for six months, the other two – for nine, and the last one – for ten. You add all the months 6+6+9+9+10=40 and divide them by the number of existing clients, or 5. This way, 8 months is the average customer lifespan of your client, say, last year. 

Average Customer Lifespan Formula

However, some companies find it difficult to define the figures to put into the customer lifetime value formula. That's because, for instance, they have many product categories, demographic influences, and other micro indicators that complicate calculating customer lifetime revenue. Also, some parameters can be approximated and blur the final numbers. 

Now, when you know how to calculate Customer Lifetime Value, let's check how your company can use this metric. 

Why CLV Is Critical for Your Business

It's vital to measure customer lifetime revenue because it can help you get more income. And there are several ways to use the lifetime value parameter:

1) You can target customers better.

The CLV formula allows for determining the most revenue-generating buyers. This way, companies should start growing their marketing investments into such customer segments. With the thought of retention, you can create well-targeted campaigns. They'll help you grow the average lifetime value and build trustful long-term relationships with the most valuable customers and potential game-changers. 

You've probably heard that the customer acquisition expenses are always greater than your re-engagement marketing efforts. But this doesn't mean you should stop lead generation. Moreover, the customer lifetime value calculation will let you craft profiles of your potential best customers. And therefore, launch better targeted and personalized outreach. 

2) You can improve the customer loyalty program.

Encouraging repeat business and retaining customers is critical for building your brand reputation and keeping revenues stable. Because in the tough times, loyal clients will let your business bear the operating costs. But how lifetime value calculation can help grow your clients' purchasing enthusiasm? 

It comes in handy when you analyze the features of buyers with a high customer lifetime. That's because loyalty and the lifetime value of a customer are closely related, as the more buyers are addicted to your brand, the more lifetime value they generate. Still, you need to compare the customer lifetime value against the customer acquisition costs to decide which segments to embrace first. 

3) You can spot early signs of reduction.

Many customer-focused instruments allow real-time monitoring of the lifetime value of a customer. And once these numbers change, marketers can quickly react. Has the average purchase value grown due to the latest discounts or upsell initiatives? Or was it the result of the latest press release or social media ads? The answer will adjust the focus of your retention strategy and the split of marketing costs.

For example, the average revenue per person from a specific audience grows due to promotional newsletters. In this case, marketers can arrange a survey to find out customer preferences and create more personalized and targeted content. The unexpected decrease in the customer lifespan will urge identifying bottlenecks in the customer journey.

4) You can make more data-driven forecasts.

Customer lifetime value calculations are critical for planning budgets. And it's not only about marketing and sales forecasts. Since the estimated average purchase of each client from month to month forms your company's recurring revenue, your financial viability depends on the accuracy of the lifetime value calculation. 

Along with defining how much revenue you'll get, it's essential to calculate customer lifetime value to assess costs, plan for inventory supply, or recruit additional staff. You'll be able to make decisions based on reliable numbers rather than using straight-line or moving average forecasting methods. The data-driven approach will prevent you from overspending and understanding.

However, it's not enough to figure out parameters and add them into the customer lifetime value formula to satisfy every existing customer and get sustainable revenue. You need to have a complex vision of your clients and embrace various characteristics of their satisfaction with your brand. And below, there are some of the related parameters which can help. 

Other Relevant Metrics 

  1. Customer Acquisition Cost (CAC). This metric shows how much you spend on various activities that help you attract a new buyer. The acquisition costs include marketing and sales activities, advertising, etc. While the CAC shows how much you invest in one customer, customer lifetime value reflects the opposite, the revenue side. And the CLV/CAC ratio demonstrates whether you have enough margin to cover your operating costs.
  2. Customer retention and churn rates. The retention indicator shows how many clients you start a period with and stay with you till its end. And this number excludes new customers. Suppose that in January, you have 100 buyers and get 10 new through the year. And once you finish with 70 in December, you have a 60% retention rate. The churn rate is the opposite of the retention number. And if you divide 1 by the churn rate, you get the customer lifetime.
  3. Net Promoter Score (NPS). This parameter assesses whether customers demonstrate brand loyalty. The score is backed by asking your clients how likely they will recommend your company to others. Loyal customers will give you 9-10 points out of 10, and they’re called Promoters. Passives will rate you 7-8, while clients with the poorest customer loyalty (Detractors) return the lowest 0-6 score. When you subtract Detractors from Promoters, that's the NPS. However, Promoters aren't necessarily high CLV customers.
  4. Customer Satisfaction Score (CSAT). This is another question-based parameter that shows how an average customer is satisfied with your products or services. Answers vary from 1 (“very unsatisfied”) to 5 (“very satisfied”). Then you need to add the “satisfied” and “very satisfied” users and divide this sum by the total number of respondents. CSAT focuses on the real-time feelings of your existing customers, while NPS gives a broader and more strategic view of how an average customer treats your brand. The net promoters and satisfaction scores are used to assess the customer experience and entire relationship with a client. 

How Much Do You Spend on a Customer?

It's time to look at the opposite side of the customer lifetime revenue – the funds you spend on attracting a new buyer. In the previous section, we've mentioned that client acquisition cost is among the metrics closely related to what you earn from loyal clients. And the CAC formula is simple: you divide the marketing, sales, and all associated costs for the period by the number of new clients engaged. 

Once you multiply the average purchase value of the newcomer by the number of purchases made during the customer lifespan and subtract the cost of acquiring this customer, you'll get the Return on Investment (ROI) metric. This result can help you detect the most cost-effective channel for converting leads into clients.

However, CAC and CLV should work together. For example, if you launch a social media ad campaign for $500 and it attracts 5 buyers, you'll calculate that each customer costs you $100. But an email drip campaign is cheaper ($200), bringing in the same 5 clients at $40 each. Your marketing budget for the next month is $1,000, so which channel will you prioritize?

As far as you're aware of the CAC, you'll choose to invest and acquire 25 instead of 10 clients. But let's suppose you "switch on" the customer lifetime value calculator. Now you see that the average purchase value of the person who comes through emails is around $50/month, while one social media user will pay $200. 

So, the total earnings for the next month will be $250 ($50 × 25 – $1,000) from email readers and $1,000 ($200 × 10 – $1,000) from Facebook users. Now the picture has changed! 

What Impacts Customer Lifetime Value Formula

"What is the customer lifetime value?" is only the first question you ask to understand the lifetime value concept. But as you go deeper into the topic, you want to understand what impacts the average purchase amount, how to extend a customer lifespan, and who is your average customer. And below, we'll check the drivers for getting high customer lifetime value.

  1. Customer support. The support service remains essential for keeping strong customer relationships starting from acquisition and during the whole customer lifetime. So, it's vital to be available at every stage of the buyer journey and be ready to help effectively and quickly. Positive customer experience converts satisfied buyers into loyal clients, extending the average customer lifetime and increasing the average purchase amount.
  2. Customer success. Clients contact customer support to resolve various issues with products. But customer success managers reach clients first to anticipate questions and offer solutions they may need. So, to keep existing clients happy, you must proactively consider how your product can help them. And you'll have to do that during the customer lifetime of each user.
  3. Product value. Businesses need to keep their products valuable for buyers throughout their entire lifetime. Focusing on the benefits the buyer gets and constantly monitoring features offered by competitors is critical if you want to increase customer lifetime. For instance, your product has to be available across various platforms, accessible online and offline, and work without delays.

Models of Customer Lifetime Value

Customer Lifetime Value Example

The best way to understand any principle is to see how it works. So, let's check another Customer Lifetime Value example or even three of them!

  1. Cloud service platform. A platform that offers virtual servers, storage capacities, and cloud-managed services has two payment plans: standard for $25/mo and premium for $45/mo. So, the average purchase equals $35, and assume that the customer lifespan for this product is 18 months. The average customer revenue would equal $35/mo × 18 months = $630.
  2. Online education platform. The average cost of a course on a platform costs $150. Though leads typically engage in 1-2 courses, most of them stay for 2-3 years, and the average number of educational courses they take is 1 per three months. The CLV for such a customer's lifetime will be 2 courses × 3 years × $150 = $900.
  3. Lead generation agency.In the appointment setting and B2B lead generation agency like Belkins, the average lifetime of a client is 3 years. Let’s assume businesses typically request 2-month sales assistance every six months, and these services cost around $2,000. So, the average customer spends around $12,000 (3 years × $4,000). And this amount is the lifetime value of a client.

Key Takeaways on Customer Lifetime Value: Growing Your CLV

High-value customers are precious, so keeping them happy as long as possible is vital for businesses. And though this task sounds simple, the realization isn't easy. That's because you have to embrace multiple activities and involve various professionals.

  • Improve customer service

Enabling omnichannel customer support should be the first thing on your list if you want to retain the clients you currently have. Many people prefer texting with the chatbot, but some users still hate wasting time on messaging and like getting real-time answers over the phone.

Whether your clients make returns, ask minor questions, or want to resolve complex technical problems, don't ignore their requests. Questions left unattended will leave your clients unsatisfied and damage your brand image. So, be attentive and responsive.

  • Ensure a smooth customer experience

The customer experience should be seamless from the researching stage to using your product. Errors, delays, and technical issues along the buyer journey make people feel frustrated and often irritated. Moreover, such drawbacks encourage customers to search for alternative solutions and go to your closest competitors.

So, you'll need to craft the buyer journey map and define its primary stages. Then, check how you can improve each interaction phase with your brand. For example, make your website more informative, responsive, and better structured.

  • Offer discounts 

Everybody likes discounts though this strategy isn't new. The discount volume is critical, but knowing which percentage works better with specific buyer segments is essential to maximize your benefit. And one more vital parameter is the right time for your offer.

Whether you want to reward loyal buyers, send a special offer, follow up with new subscribers, or propose early-bird discounts for upcoming products, don't forget how and when to come up with your proposal.

  • Ask for feedback

When you get the response directly from your clients, it can help in two ways. The first advantage is that they feel valued and important to you. The second benefit is that replies can let you notice the drawbacks in your communication with clients.

Ineffective customer support, non-personalized content, or too many marketing emails can make customers turn away from your brand. And once you know it, you'll be able to mitigate the risk and harm.

  • Upsell and cross-sell

Purchasing complementary products feels so natural. In most cases, brands know better what additional product their client will need and offer it immediately. Cross-selling recommendations are all around in e-commerce because they work. And both parties benefit from them: you get extra profit and leave high CLV customers satisfied.

Upselling is also practical since you let customers compare offers from various producers. The catchy component of upselling technique is value visualization since you offer more expensive products with the same or more sophisticated features. 

  • Update your tech stack

If you sell a SaaS product, keeping the software updated is critical for streamlining processes and ensuring security. So, advanced instruments will prepare your IT infrastructure for increasing volumes, better performance, and agility. 

Introducing APIs can help you and your customers better structure data and allow for integrations with other software. Outdated technology stack can cause security issues, compromise personal information, or slow down your clients' working processes.

  • Personalize offers

Customers of the 21st century are blessed and spoiled by AI technologies. These algorithms can collect first-party data about every interaction with a brand and craft highly relevant and perfectly personalized proposals.

So, don't miss the opportunity to deliver nearly ideal offers and re-engage existing clients. Whether they abandon carts, shop without purchasing, or look at the "Other customers also buy" section, monitor this activity. And then pick up the right moment to impress clients with exceptional personalization.

Wrapping Up

If you wonder how to calculate customer lifetime value, improve customer relationships, and grow retention and loyalty to your brands, this article has the answers. The Customer Lifetime Value will help you increase the average purchase value, customer lifetime, and forecast repeat sales. We hope our customer lifetime value example will help you better understand all aspects of this metric.