The lifetime value of a customer, or customer lifetime value (CLV), represents the total amount of money a single customer is expected to spend in your business, or on your products, during their lifetime minus the cost of acquiring that customer. It’s an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.

CLV is distinct from the Net Promoter Score (NPS) that measures customer loyalty, and CSAT that measures customer satisfaction because it is tangibly linked to revenue rather than a somewhat intangible promise of loyalty and satisfaction.

How to use it

If you want your business to acquire and retain highly valuable customers, then it’s essential that your team learns what customer lifetime value is and how to calculate it. By knowing this statistic it can help you make decisions about how much money to invest in acquiring new customers and retaining existing ones.

Ultimately, you don’t need to get bogged down in complex calculations – you just need to be mindful of the value that a customer provides over their lifetime relationship with you. By understanding the customer experience and measuring feedback at all key touchpoints, you can start to understand the key drivers of CLV, and make decisions about how much money to invest in acquiring new customers and retaining existing ones.

Calculate it

CLV can be measured in the following way:

1. Identify the touchpoints where the customer creates the value
2. Integrate records to create the customer journey
3. Measure revenue at each touchpoint
4. Add together over the lifetime of that customer
5. Subtract the cost of acquiring the customer

Formula

The simplest formula for measuring CLV is:

Customer revenue per year

multiplied by

Duration of the relationship in years

minus

Total costs of acquiring and serving the customer

Equals the CLV

This formula is perfect for situations where the figures are likely to remain relatively flat year-on-year, as with the Christmas tree example. It’s an example of historic CLV – a measure that works by looking back at past events.

You can also calculate predictive CLV. This is an algorithmic process that takes historical data and uses it to make a smart prediction of how long a customer relationship is likely to last and what its value will be.

Here’s a worked example of the customer lifetime value calculation using the simple formula above.

Customer A’s revenue per year = $500

Customer relationship duration = 10 years

Cost of acquisition = $50

Cost to serve = $50 per year ($500 over 10 years)

So the math looks something like this:

$500 x 10 = $5,000

$5,000 – $550 = $4,450

CLV for Customer A = $4,450

But what happens when your customer revenues don’t stay flat year on year, and you need to factor in changes that happen across the customer lifetime?

If this is the case, you need a formula that goes into a little more detail. The traditional customer lifetime value formula fits the bill for many businesses in this position.

Traditional CLV formula

• This calculation involves a few additional concepts:

GML – gross margin per customer lifespan

• This is the profit you’d expect to make over the average customer lifespan (i.e. the revenue minus your costs)

R – retention rate

• The percentage of customers who stay with you over a set time period (as opposed to those that churn during that time)

D – discount rate

• A percentage to account for inflation. This is frequently set at 10%.

GML * R / (1 + D – R) = CLV

Let’s take a look at this customer lifetime value calculation in action…

• Your company’s GML = $2200

• Your customer retention rate = 70%

• Discount rate of 10%

So:

• 2200 * .70 / (1 + 0.10 – 0.70) = 3850 = CLV

How To Improve CLV

How to improve your customer’s lifetime value is the most important because it’s six to seven times more expensive to acquire a new customer than it is to keep a current one. However, it’s important to keep in mind that what might work for one business might not work for another. In order to create the most efficient strategy for your business, you need to identify

• Sales: Increase per customer sales

• Loyalty: Retain customers longer

• Cost: Lower the cost to serve

Return customers mean reduced marketing costs

• Remarketing Email list
  • By encouraging visitors to your website to give you their email, you can build an email list to keep your brand in front of bounced traffic after they leave your website

• Upsell
  • Increasing the value of the specific sales interaction
    • Auto-dealers selling accessories with the car: higher spec paint, window tinting, better wheels, etc
    • Banks offering clients increased credit limits on credit cards: this approach is a little controversial but banks know, on average, when a customer’s credit limit goes up they will use at least some of that extra limit. This usage stimulation is upsell.
    • “Meal deals” at fast food restaurants: these are a combination of up-sell and cross-sell

• Cross-selling
  • Selling new products or services to your existing customers
    • The ubiquitous “would you like fries with that”
    • Insurance companies selling car insurance to home insurance customers
    • Banks selling credit cards to mortgage customers

You know both upselling and cross-selling work because of the abundance of companies that use them. However, they can also be overused, resulting in a negative impact on customer relationships.

• Invest in customer experience
  • Understanding the expectations of your customer and continuously improving their experience to meet them is a key driver of long-term customer loyalty.
  • In 2016, NewVoiceMedia revealed that U.S. companies providing poor service were letting an estimated $62 billion slip into the pockets of their competitors. Today that number has reached $75 billion.

• Customer Education
  • This is a never ending process:
    • Customers often leave because another vendor has shown them a similar product or service which has a feature you do not have.
    • The crux of the problem is you may have the feature – they just don’t know it.
    • If you have an even moderately complex product or service, it can be well worthwhile to provide on-going education to customers about it.
    • The approach is even more important for software and Software as a Services (SaaS) companies who are constantly adding new features to their products. Getting uptake on new features is critically important in the retention process as it wards off others suppliers.

• Saving Customers who ask to Cancel their Product/Service
  • Excellent for subscription based services

• Start a loyalty program
  • Rewarding and recognizing customers for their ongoing business
    • Of course, you can spend a lot of money and never change the loyalty of your customers. So you need to be certain that your loyalty program is delivering a net customer value improvement.
  • Recognize and reward your best customers

• Cut down customer churn and use them to bring new customers
  • In order to succeed at retaining customers who would otherwise abandon the business, marketers and retention experts must be able to:
    1. predict in advance which customers are going to churn through churn analysis
    2. know which marketing actions will have the greatest retention impact on each particular customer

Lower the cost to serve your customer

• Stop marketing to low value customers
  • Ensure that you are not continuing to market to customers who cannot or will not buy more of your products and services 
• Move customers to lower cost channels
  • Approach this option with caution, if done well, this can add substantial value to your business, but all potential consequences should be considered to avoid backfiring.
    • Back, in the mists of time, when ATMs first arrived in Australia, the banks rushed to install them and move as much foot traffic to the “lower cost to serve” ATM channel.
      1. This worked perfectly to lower cost.
      2. However, the banks soon discovered that they had also lost most of their cross -sell opportunities.
      3. When customers come into the branch to perform a transaction, they are more likely to set aside time to perform the transaction and spend a few minutes discussing other products and options with staff. This is in contrast to outbound contact methods: phone calls and direct mail, which are “interruptions” in the day of customers – something to be disposed of as soon as possible.
    • Off-Shore call services
      1. Lowered cost but hurt customer service
      2. Poor customer service hurt client loyalty

Reduce the Cost of Customer Acquisition

CLV goes hand in hand with another important metric – CAC (customer acquisition cost). That’s the money you invest in attracting a new customer, including advertising, marketing, special offers and so on. Customer lifetime value only really makes sense if you also take the CAC into account

Another factor in the equation is Cost to Serve. This is part of the cost of doing business, and it involves everything you do to get the product or service into the customer’s hands and doing what they need it to do. For example, logistics, overheads in your physical location, contact center costs and so on.

• Close the loop with unhappy customers
  • Address negative reviews and fix issues if possible
    • Negative review makes it harder to get new client which increases the cost of acquisition
• Referral system
  • Giving your clients helps build loyalty as well as lower cost of customer acquisition
• Increase Conversion Rate
  • Provide solutions for potential customers pain points
• Realize what strategy works for your company
  • What works for one company may not be the solution for you, and can increase your COA
• Utilizing Marketing Automation
  • B2C marketers who take advantage of automation including everything from cart abandonment programs to birthday emails have seen conversion rates as high as 50%. 

Making things happen

The key to implementing effective strategies for delivering customer value is selecting combinations of approaches that create synergistic impact on customer value.

For example, combining cross sell, upsell and customer education messaging in one campaign.

With a single campaign you can support and enhance the customer perception of your organization and increase customer loyalty.

Key elements that form the foundation for developing and implementing a combination of strategies that deliver customer value are:

• Create a Practical Strategies
  • Select practical strategies that can be implemented by your company and take into account your company’s systems abilities.

• Appropriate timing
  • Determining the appropriate time to contact customers, and selecting the most appropriate communications channel is important.
  • Do not base the timing on what is appropriate for the company. Instead, look at what the customer would want.

• Access the Return on Investment
  • Before: Ensure that you consider customer value according to both their current and potential spend with your organization and assess the customer lifetime value impact of the change.
  • During: Evaluate the campaign’s impact against your projections