Customer Lifetime Value (CLV) is the key to building a sustainable, growth-driven business. Today, attracting new customers isn’t simply enough. A business’s true success lies in how well it retains its customers and maximises the value it brings over time. CLV focuses on nurturing long-term relationships, which not only increases revenue but also strengthens brand loyalty.
A customer-focused approach to marketing and sales strategy can unlock huge potential and create a growth model that thrives well into the future. 52% of marketers adjust their strategies and tactics based on customer feedback and interactions.
This blog will explore the benefits of strong CLV and practical and impactful ways to improve it, ensuring your business grows stronger with each customer interaction.
What Does Customer Lifetime Value Mean?
As an eCommerce business, the total amount of revenue you can expect to generate from a particular customer during their lifetime is known as customer lifetime value. Since it takes into account several factors, including purchase frequency and volumes, costs, differences in products, etc., it’s one of the most effective ways to measure customer satisfaction, trust, and loyalty to your brand. The longer customers stay with your brand, the greater their lifetime value.
So, how can you calculate CLV?
- Estimate a customer’s lifecycle with your business.
- Forecast production of the items in the future to predict future revenues.
- Estimate the total cost associated with producing and delivering those estimated future products.
- Calculate the current value of the total amount of revenue.
Here’s the formula to calculate customer lifetime value.
CLV = Average order value x Purchase frequency x Average customer lifetime
Let’s look at an example of calculating CLV using this formula.
Suppose you run an eCommerce business in the food and beverage industry. You want to calculate the LTV of a typical customer to plan marketing and customer retention campaigns better.
On average, customers spend Rs. 1,000 per order on your products and make 12 purchases every year. Based on past data, customers typically remain loyal for 5 years.
Using the formula:
CLV = 1,000 x 12 x 5 = Rs. 60,000
Did you know the customer lifetime value of the food and beverage segment stood at over 258 US dollars worldwide in 2023, followed by the health and wellness industry in second place?
When you calculate the customer lifetime value, you can analyse the total revenue generated by a customer and the total average profit, as each of these metrics will give you insights into how customers interact with your business. You’ll also get to know whether your marketing plan and strategy are working as you expected.
Other metrics that can impact customer lifetime value include the following:
- Average Purchase Value (APV): It refers to the amount a customer spends each time they make a purchase.
- Purchase Frequency (PF): This metric tells how often the same customer returns for repeat purchases.
- Customer Lifespan (CF): The average amount of time a customer purchases from your brand is their lifespan with your company.
- Customer Churn Rate: Churn rate refers to the percentage of customers who stop purchasing products over a certain period.
- Customer Profitability Score (CPS): It shows how profitable a customer is over their lifetime, taking revenue generated and associated costs, including customer acquisition costs, service costs, etc.
Customer Lifetime Value Models
You can use two different models – predictive CLV or historical CLV – to measure customer lifetime value. Based on which one you choose, the outcomes will vary. The results will depend on whether you analyse pre-existing data or try to figure out your customers’ behaviour in the future based on current circumstances.
The predictive CLV model uses regression or machine learning to forecast new and existing customers’ buying behaviour. It can help you determine the products or services that bring a lot of customers, identify the most valuable customers, and how to improve customer retention.
Conversely, the historical model for calculating CLV uses past data to predict customer value. It doesn’t take into account whether customers will continue doing business with your brand. This model is especially useful for your business if your customers interact with you only over a certain period. However, it has some drawbacks because most customer journeys are not identical.
The Business Impact of a Strong CLV
Here are the major benefits of a strong customer lifetime value.
- It allows you to measure the financial impact of your marketing campaigns and initiatives, advertising efforts, and other activities. It can even help you change the way you think about marketing as a whole in terms of spending underutilised areas and focusing on loyalty.
- Understanding the financial impact of your marketing activities can help you align your business objectives and achieve bigger financial goals in the future.
- It can help you balance your short-term and long-term marketing goals, encourage better decision-making by allowing you to spend less time acquiring low-value customers, and achieve a higher return on investment.
- It can help you increase revenue over time. The longer a customer’s lifecycle and the more value they bring during their lifetime, the more revenue your business can generate. You can segment customers based on their value and revenue and find cross-selling and upselling opportunities to encourage repeat purchases.
- Prioritising CLV can help your business identify trends in customer data and issues, boost customer loyalty and retention, and understand customer behaviour, preferences, and shopping patterns, facilitating data-driven decision-making.
- Tracking lifetime value makes it easier to segment your customers based on their needs, behaviour, preferences, and profitability. Knowing how much they’ll spend over time, you can create a customer acquisition strategy that specifically targets those customers who’ll spend the most on your products.
- It’s less expensive to retain existing customers than it is to acquire new ones. A strong CLV can help you reduce overall customer acquisition costs by ensuring customer loyalty and word-of-mouth referrals and reducing marketing and sales expenses.
- CLV trends can help you improve your products and services by guiding you to examine customer behaviour and feedback. Based on their pain points, you can even change your approach to product development.
- It can simplify financial planning by offering valuable insights into customers’ relationships with your brand, potential revenue streams, and changes in customer behaviour. Thus, you can accurately predict cash flows in the future and ensure more informed financial planning for your business.
Strategies for Growing Your Customer’s Lifetime Value
Here are some effective ways to improve your customer’s lifetime value.
- Improve Your Onboarding Process
There are several ways to optimise your onboarding process. You can use customer data to personalise the onboarding process, enable customers to easily find information, and offer quick support whenever they need it. You can collect customer feedback through surveys and track key onboarding KPIs like activation rate, customer retention rate, time to first interaction, repeat purchase rate, etc., to further enhance your onboarding process.
Reducing revenue leakage during onboarding can significantly improve customer retention and increase lifetime value, as customers who feel welcomed and supported are more likely to continue their relationship with your brand.
- Active Communication
If you notice a decrease in engagement or an increase in the number of issues they report, contact your customers and offer help and relevant resources. Keeping a close eye on their behaviour can help you identify potential issues, address them promptly, and retain them.
Once you have addressed an issue, follow up regularly to ensure customers are satisfied with the solution you’ve offered and to let them know they are a valued part of your business. You can build long-lasting relationships with your customers by personalising outreach, responding to their messages and comments on social media, sharing relevant content, and hosting interactive events.
- Adapt and Implement Feedback
Ask your customers to share their feedback regularly after every purchase. You can use this feedback to improve your products or services. It tells your customers that you value their feedback, increasing customer satisfaction and enhancing brand loyalty. You can even keep them updated on how you’ve implemented their feedback.
- Identify High-Value Customers Early
Prioritise customers who show a lot of interest in your products and make big purchases by giving them personalised offers, premium support, etc. Making your customers feel special and valued is not only good service but also good business.
- Leverage Upselling (and Cross-Selling) Opportunities
Use customer relationship management softwares to analyse purchasing patterns and discover opportunities for upselling. However, ensure you’re upselling products that are beneficial and relevant to them. Increasing your average order value is one of the most effective ways to improve CLV.
Upselling and even cross-selling work best when your customers are about to check out and you offer relevant complementary products. You can offer tiered pricing and other pricing options, bundled packages at discounted prices, or even create targeted promotions to increase order value.
- Focus on Improving Sales
You can increase sales for your business in various ways, including increasing sales per order, reducing costs to serve customers, or increasing sales over time. Optimising sales means customers will continue to do business with you in the foreseeable future, increasing CLV and ensuring a steady flow of revenue.
- Improve Your Customer Service
A staggering 93% of customers are likely to make repeat purchases with a business that offers excellent customer support service, according to a 2023 HubSpot report. Paying close attention to your customer service can help you improve your CLV. Several ways to improve your customer service include using omnichannel customer support, adding personalised services, enhancing customer service training, and offering a clear return and refund policy. You can also implement systems to analyse data from customer surveys and feedback.
You should avoid these mistakes while calculating the customer’s lifetime value:
- Not aligning customer lifetime value with your business goals and objectives.
- Incorrect segmentation of your customers can cause your marketing efforts to fail completely.
- Choosing an unrealistic value for your customer’s lifetime.
- Not taking flexibility over time into account, including the changing prices of your products or services and the economy as a whole, which will impact the CLV.
So, how can you predict and manage risks to customer lifetime value?
- If you find a trend of decreasing spend over time, the customer is reducing the number of products they purchase or the services they avail.
- If a customer raises more complaints and issues, it can signal dissatisfaction. It’s important to proactively contact your customers and resolve these problems. This can help you turn a potentially negative situation into a positive customer experience, re-strengthening your brand’s image.
- When customers request changes in contract terms or services, it means their needs are evolving. You can engage with them to understand what they’re looking for and adapt accordingly to retain them as satisfied customers in the long run.
Conclusion
Focusing on customer lifetime value transforms how your business approaches growth. It shifts your perspective from quick wins to long-term success. Investing in loyalty programs, delivering exceptional customer experiences, and tailoring your services to meet customer needs can drive revenue and build a brand people trust and stay with. Sustainable growth happens when customers feel valued, appreciated, and connected to your business. Start implementing these strategies today, and watch those strong customer relationships become lasting success. Your future growth will always start with the customers you already have.Ready to unlock the full potential of your customer relationships? With brands like Shiprocket Engage 360, you can effortlessly track and optimise customer interactions, ensuring better retention, higher lifetime value, and sustainable business growth. Start nurturing your most valuable customers today!
