How much are your customers actually worth? Whether you use the term customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV), they all describe the same thing. CLV is the estimated revenue (better yet, net profit) that a customer will generate during their relationship with your company.
When you refer to the customer lifetime value you need to go beyond the initial purchase. The prediction model has to include how much a customer is likely to spend on future products and services your company provides. And right there’s the catch: it’s a prediction model that can have varying levels of accuracy, based on the techniques and analysis used.
The Importance of Customer Lifetime Value
Why is projecting the revenue (net profit) that a customer will generate with you during their lifetime so important?
First of all, knowing your CLV will help you optimize and solidify your marketing budget. One of the biggest challenges marketers have is setting proper marketing budgets. By calculating your customer lifetime value, you will “know” how much to spend on customer acquisition and retention.
Second, you’ll be able to take action based on facts. This alone will differentiate you from the crowd, as most people’s marketing is something I like to call “random acts and hope”.
And third, you’ll make your CEO happy. CEO’s love to see their teams focus on customers AND profits at the same time.
The team at Kissmetrics created a handy infographic about CLV. Based on a case study – it’s Starbucks – you will learn how to calculate the lifetime value of your customers, and more importantly, how to use the information to solidify your marketing budget.
In the beginning of this blog post I mentioned the fact that there are varies levels of accuracy and sophistication when it comes to determining the customer lifetime value. It all depends on the analysis and techniques used to predict the results.
How to Grow a Business and Boost CLV
Simply put, there are only three ways to grow a business. Prior to sharing the 3 ways I’d like to give credit to Jay Abraham who first introduced this concept.
The 3 ways to grow a business are:
- Increase the number of clients => get more new prospects into paying customers
- Increase the average transaction value => get each client to buy more at each purchase
- Increase the frequency of repurchase => get each customer to buy from you more often
This being said, how can you boost customer lifetime value?
First, go back to the basics of marketing and determine the “good” customers. These might cost more to acquire, but they’ll likely be more profitable. Focus on this customer segment and on acquiring more “good” customers.
Second, keep in mind what research has found; namely that a 5% increase in customer retention can increase profits by 25% to 95%.
According to the same study, it costs 6 to 7 times more to gain a new customer than to keep an existing one. Therefore the second tip is to focus relentlessly on customer retention!
How do you delight your customers? What metrics do you use to calculate customer lifetime value?