Determine the Customer’s Lifetime Value
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What keeps a customer coming back?
Customers are acquired and lost over the life of every business, but a genuinely exceptional product or service can keep customers well-nourished while yet leaving them hungry more figuratively speaking.
This desire for more is what provides value to the organization over the course of its client relationship.
How to Calculate the Customer Lifetime Value?
Customer lifetime value (CLV) is a critical statistic virtually any customer experience (CX) program.
It enables you to determine how profitable (or not!) a specific customer or consumer segment is over the course of their association with your business.
Learn how to compute CLV and apply the customer lifetime value formula in conjunction with your other KPIs to uncover income opportunities.
We’ve all heard the proverb that it costs less to keep an existing customer than it does to get a new one. While there’s nothing wrong with that, it’s riddled with ambiguity.
What about existing clients who cost you more to serve than they bring in?
Which customers or segments merit increased investment?
CLV is how you respond to such inquiries.
It demonstrates how much a client is worth to you throughout the course of their relationship with the firm, and it’s an important CX statistic because it’s directly related to the bottom line.
When compared to the Net Promoter Score (NPS) or Customer Satisfaction (CSAT), both of which are frequently used to gauge customer loyalty.
While CLV gauges a direct impact on revenue, NPS and CSAT measure the potential of future loyalty.
You’ll know how much it’s worth investing in the customer experience to see a good ROI by calculating CLV.
It’s also valuable in developing customer loyalty prediction models, especially for firms with long-term relationships with their customers, because a reduction in CLV can be an early indicator of attrition.
What you’ll need to know about calculating customer lifetime value?
CLV can be computed at three levels:
- Company (the average CLV across all of your customers)
- Customer segment(the CLV of unique groups within your customer base)
- Individual (the CLV of each individual customer you deal with).
To begin, let’s start with a company-wide CLV. But, before you get into the CLV formula, you’ll need a few pieces of information.
- Average purchase value — the value of all customer purchases over a particular timeframe (a year is usually easiest), divided by the number of purchases in that period
- Average purchase frequency — divide the number of purchases in that same time period by the number of individual customers who made a transaction over the same period
- Customer value — the average purchase frequency multiplied by the average purchase value
- Average customer lifespan — the average length of time a customer continues buying from you.
Customer Lifetime Value Calculation
Because client lifetime value is a financial prediction, a company must make educated assumptions.
To calculate CLV, a business owner, for example, must estimate the average sale value, average number of transactions, and duration of the business relationship with a certain customer.
Established organizations with past customer data may determine customer lifetime value more precisely.
Here’s how to calculate customer lifetime value.
First, calculate the lifetime value by multiplying the average value of a sale, the average number of transactions, and the average customer retention period.
Lifetime Value = Average Value of Sale × Number of Transactions × Retention Time Period
Since the lifetime value of a customer is calculated in gross revenue terms, it does not take operating expenses into consideration.
How much did it cost to make the product, advertise, and manage operations?
Take these operating expenses into account when calculating customer lifetime value.
Customer Lifetime Value = Average Value of Sale × Number of Transactions × Retention Time Period × Profit Margin
Customer Lifetime Value (CLV) = Lifetime Value × Profit Margin
Customer Lifetime Value Contributing Factor
When calculating client lifetime value, we must consider how the customer perceives the brand in question.
If a customer does not sense brand loyalty or incurs switching costs when converting their company to a competitor’s goods, CLV is likely to suffer. When improving revenues and client lifetime value, we must also examine how scalable the sales and marketing operations are.
Think about the following:
- Churn Rate
- Customer Loyalty
- Scalable Sales Marketing
How frequently do clients abandon a previously patronized business?
The rate of attrition, or churn rate, varies per business and is determined by the competitive advantage a company may demand.
Startups, for example, have a substantially higher turnover rate than embedded incumbents in a particular field.
The churn rate is calculated as follows:
Customers at the conclusion of the period are subtracted from customers at the beginning of the term.
Taking the difference and dividing it by the number of clients at the start of the month.
For example, if a company began the year with 1,000 devoted clients and concluded the year with 750, its churn rate would be 25%. This means that 25% of their consumers went elsewhere to do business.
How devoted are your customers?
A customer is termed brand-agnostic if they have no emotional attachment to a certain brand.
Building brand loyalty is critical for every organization since it directly corresponds to higher customer retention rates and lower churn rates.
Brand advocates will speak out on the company’s behalf. They will generate word-of-mouth marketing as brand ambassadors.
Customer lifetime value is expected to be higher for brands with loyal customers.
Scalable Sales Marketing
What is the scalability of your sales and marketing strategies?
If a company’s revenue growth is closely tied to its sales and marketing expenses, it is critical that such efforts be optimized.
If revenue falls as sales and marketing expenses rise, profit margins will be compressed, potentially resulting in a loss.
As a result, a scalable sales and marketing strategy is critical.
When efforts are proving unproductive, tracking important metrics and assessing results will enable swift strategic pivots. You may scale your sales and marketing by testing additional channels, A/B testing tactics, and optimizing for conversions.
How to Improve Customer Lifetime Value?
How can a business impact the customer experience to boost client lifetime value?
Some businesses have the benefit of a true “moat,” or an effective barrier against rival disruption.
Companies that use economies of scale, for example, can achieve significantly cheaper prices than their competitors.
Most businesses, on the other hand, do not have this luxury.
This implies they must use focused, tailored, and relevant communication to boost operational efficiencies and impress customers.
With turnover rates at their peak following a single interaction with the average firm, it’s critical to establish a good first impression.
Customers frequently require education on the features and benefits of your product in order to properly appreciate how the product can improve their life.
Effective onboarding in a service firm can be as easy as exhibiting a commitment to customer service and availability to fix client problems.
Being sensitive to the demands of a first-time consumer and assuaging any doubts about their purchasing decision should be the top priority for this initial engagement.
An open line of communication between the company and the client enhances the relationship and humanizes the organization.
Responding to criticism, particularly negative comments and low ratings, is more vital than ever in today’s atmosphere.
Customers like it when their opinions are taken into consideration.
Simply acknowledging that a firm is open to input and that their problems will be handled can be a motivator for repeat business.
Improving the efficacy of client communication extends to sales and marketing copy as well. The churn rate and ad conversion rate can be used to gauge the effectiveness of consumer communication.
Putting in place a loyalty program is a terrific approach to personalize the customer experience while motivating repeat purchases.
Some popular loyalty programmers provide reward points or the potential to access free and discounted products after a certain number of purchases.
Buy nine cups of coffee and receive the tenth free.
Customers are proud of the incentives they have earned, and businesses benefit from an increase in client lifetime value.
Customers who use an airline’s exclusive credit card, for example, are rewarded with free miles that can be used to offset the cost of a flight or accumulate to a free flight.
Re-engaging customers who have already interacted with the company is one of the most essential strategies for increasing client lifetime value.
Retargeting can serve as a simple reminder of the firm while also increasing brand familiarity.
Products having a shelf life can profit tremendously from retargeting efforts because their time-sensitive nature necessitates additional purchase.
Customer lifetime value is a measure that all firms should consider when forecasting future growth and profitability.
Businesses should employ measures to maximize client lifetime value, especially because the cost of retaining an existing customer is far lower than the cost of obtaining a new customer.
Statistics on Customer Lifetime Value
A decent customer lifetime value definition is simple: the longer a customer stays with your organization, the more value they contribute to it.
The following data demonstrate the importance of nurturing CLV throughout the client journey:
- A 5% improvement in retention results in a 25% increase in earnings.
- Acquiring new client costs between 5x and 25x more than keeping an existing customer.
- The likelihood of converting an existing customer is between 60% and 70%.
- Existing consumers spend 67 percent more than new customers on average.
- CLV is viewed as an important idea by 76 percent of businesses.
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