For brands navigating the twists and turns of consumer business, getting a firm handle on Customer Lifetime Value (CLV) is a sure-fire way to steer toward sustainable growth and profit. CLV sheds light on the long-term worth of your customers, giving your marketing and other customer-facing teams solid direction on where to prioritize their effort. In this piece, we'll dig into the definition of CLV, how to calculate it, and some strategies to give it a boost. By focusing on CLV, you can promote customer loyalty, build stronger customer relationships, and ultimately, fatten your bottom line.
Defining customer lifetime value (CLV) and lifetime value (LTV)
Let's simplify it - Customer Lifetime Value, also known as CLV, CLTV, or LTV, is a measure of the net profit a customer brings to your business over the entirety of their relationship with you. It takes into account elements like purchase frequency, the average value of each purchase, and the total revenue a customer generates. CLV gives you a better understanding of the worth of different customer segments and guides decisions related to marketing budgets, customer retention strategies, and customer acquisition costs.
CLV can be a historical measure based just on the data you have, and with the right analytic models it can also be a predictive measure, extrapolating from what’s happened to give you a sense of not just how valuable that customer has been so far but how valuable they will be going forward.
Why understanding CLV matters
Getting to grips with CLV offers a bunch of benefits that can significantly propel growth. By calculating and understanding CLV, marketing and sales folks can make informed decisions and put strategies into action that yield considerable advantages:
Promoting customer loyalty: With a good understanding of each customer's potential value over an extended period, you can concentrate on building durable relationships. This involves going beyond single transactions and prioritizing unforgettable customer experiences for the high-value customers most likely to respond. By investing in personalized interactions, custom-made solutions, and top-notch service, you boost customer satisfaction, solidify loyalty, and increase the likelihood of repeat purchases.
Maximizing resources: When you know who your most valuable customers are, you can focus your campaigns on them to get the best return on your investment. A subset of high-value customers typically has an outsized impact, with the top 10% of customers contributing up to 70% of repeat customer revenue; prioritizing standout experiences and white-glove service for those high CLV customers will mean your time and dollars are better spent.
Spurring sustainable growth: By spotting opportunities to boost CLV, like upselling and cross-selling, you can generate maximum revenue from existing customers. These techniques not only help increase the average purchase value but also tempt customers to explore your additional offerings, strengthening the overall customer relationship and pushing up customer lifetime value.
Adapting to the evolving marketplace: By using CLV as a critical customer metric when analyzing the outcomes of different initiatives, you can better identify areas that need tweaking and make decisions based on data rather than intuition alone. This iterative process helps your business stay nimble, fine-tune marketing and sales efforts, and set yourself up for long-term success.
How to calculate customer lifetime value
To work out CLV, businesses use a formula that includes several variables. Here's a commonly used one:
CLV = Average Purchase Value x Purchase Frequency x Average Customer Lifespan
Let's break this down:
Average purchase value: This represents the average amount a customer spends per transaction. You can calculate it by dividing the total revenue generated by the total number of purchases made by customers.
Purchase frequency: This shows how often a customer makes purchases within a given timeframe. You can find it by dividing the total number of purchases by the total number of customers.
Average customer lifespan: This refers to the average length of time a customer continues to interact with a business. You can figure it out by determining the churn rate (the rate at which customers stop doing business with you) and dividing one by the churn rate. You can calculate the churn rate by dividing the number of customers lost during a specific period by the total number of customers at the beginning of that period.
With these values, you can estimate the CLV for different customer segments, gaining valuable insights into the potential long-term value of your customers
Of course, it doesn’t have to be a manual process. Customer data tools like Amperity can automatically calculate CLV for each customer and keep the value up to date based on new data that comes in over the course of the customer’s relationship with the brand.
Ways to increase customer lifetime value
Now that we've covered the basics of CLV and how to calculate it, let's look at some tactics that can help you bump up this critical metric:
Building customer loyalty: Deliver exceptional experiences and provide personalized interactions and solutions that meet individual customer needs. Special offers for loyalty programs and incentives are great ways to thank customers for their continued support while at the same time increasing their value.
Improving customer engagement and retention: Cultivate strong relationships through efficient communication channels, like personalized emails and targeted content. Use customer feedback and data to drive enhancements in products, services, and the overall customer experience.
Spotting upselling and cross-selling opportunities: Identify and capitalize on customer needs and preferences by offering additional products or services that complement their current purchases. Use suggestive selling techniques and product bundling to encourage customers to check out more options and increase their overall spend.
Offering proactive customer support and post-purchase nurturing: Address customer concerns and issues promptly to ensure their satisfaction and keep churn to a minimum. Foster long-term relationships through continued engagement, such as follow-up emails, exclusive offers, and personalized suggestions. Learn more about churn prevention.
Unified customer data is key
To execute these strategies effectively and maximize the impact of CLV it’s essential to have accurate and unified customer data. Since businesses gather data from various sources, being able to unify this data is a fundamental step in gaining a comprehensive understanding of their customers. It’s technically complex to assemble bits of data scattered across multiple systems at massive scale and with no common linking key, but certain Customer Data Platforms (like Amperity) make it easy.
With accurate and unified customer data, businesses have a clearer picture of who customers are and what their CLV is, which in turn allows them to segment their customer base more effectively to focus on the highest-value customers and maximize their chances of success.
Having comprehensive unified data also lets businesses analyze information like purchase history, demographics, and engagement patterns. This allows them to develop targeted marketing campaigns, personalized suggestions, and tailored offerings — for all customers, but especially for the highest value customers. This level of personalization improves the overall customer experience, making customers feel valued and understood, and boosting the chances of repeat purchases, long-term loyalty, and even the CLV of each customer group.
Measuring and tracking customer lifetime value
To assess the effectiveness of CLV strategies, it's important to adopt a data-driven approach to measuring and tracking performance. Here are some key considerations:
Knowing which KPIs and metrics really matter: Keep tabs on customer retention rates, customer satisfaction scores, and referral rates as indicators of successful CLV strategies. Also, monitor how these CLV-enhancing metrics affect overall revenue, customer engagement, and profitability to stay focused on what's important.
Recognize the leading indicators: There are often secondary metrics that give businesses direct feedback, enabling them to pivot quickly. Assess CLV in relation to customer acquisition costs and profit margins to ensure the long-term profitability of customer relationships. Observe how different pilot groups respond to various price promotions to find the optimal discount rate that's attractive but doesn't compromise too much profit.
The right tools make a world of difference: A Customer Data Platform like Amperity not only makes it easier to ingest and unify data, but also allows you to track data for different segments. For example, having a control group to determine if an initiative is successful, or if an increase in results is simply due to seasonality. A Business Intelligence (BI) tool lets you visualize the data in a way that makes insights easy to understand and comparisons straightforward.
The future of CLV
As customers increasingly desire personalized experiences, understanding CLV will become even more vital. The customer journey is becoming more complex, and businesses need to be adept at navigating this complexity. A focus on CLV gives brands a framework for fostering loyalty, improving customer satisfaction, and enhancing the overall customer experience — as well as knowing where their marketing dollars will be most effective. Making CLV your north star will help you boost your bottom line while also building more meaningful relationships with your customers.
Go deeper: understand how Amperity's predictive CLV outperforms industry benchmarks
If you'd like to understand how Amperity's CLV model manages to consistently outperform industry benchmark, Amperity staff Yan Yan and Nick Resnick recently published a peer-reviewed paper that goes deep in the details of our model. Download the research paper.