Customer Lifetime Value: How to Improve CLV

Customer lifetime value, also known as CLV or CLTV, measures the average amount of money a customer spends on a brand throughout their relationship with the brand. The metric provides the total revenue an average customer generates for the brand.

The CLV can tell a business owner a great deal of information about the business. Below are some of the most important ways the lifetime value of a customer can be of use to a brand:

• Budget allocation: The CLV provides vital information for allocating money in your budget. If you know how much your average customer spends, you can better understand where to invest in your company's growth. By focusing on the most active and loyal customers, you will get the most out of your investments in advertising, brand development, and marketing strategy.
• Revenue forecast: Good CLV data can help you determine future revenue. Loyal customers are likely to remain loyal, so you can rely on future purchases, leading to a stable income.
• Customer data: The CLV provides valuable information about who is buying your products, which can help you make informed decisions about how to invest in better customer loyalty. It also allows for better customer segmentation, segmenting your customer base into different groups, from the casual to the very loyal, for target marketing.
• Customer satisfaction: Knowing the behavior of your customers can make you better at customer retention, improve customer satisfaction, increase your profit margins, and cut down on the churn rate—the rate at which customers stop using your product or service.

To calculate customer lifetime value, multiply the average order value by the number of purchases made throughout the average customer lifespan. Often, a customer relationship management system or CRM performs this calculation:

1. 1. Measure the customer lifespan. It is essential to know the average customer lifespan or the average duration of customer contracts. This is the length of time the average customer stays with your brand as an existing customer, also known as the retention period.
2. 2. Calculate the order value. This metric is the average order value of purchases with your brand.
3. 3. Compute the number of purchases. To calculate CLV, you need to know the average number of purchases a customer makes over a set period—usually a year.

In some cases, companies also calculate the CLV of different customer base segments to compare groups of customers. Businesses can get additional information by subtracting the customer acquisition cost (CAC) from the CLV to determine if pursuing a particular high-value customer is worthwhile.

There are a few advantages to using the customer lifetime value, including:

1. 1. CLV directly links to revenue. Unlike some other metrics, CLV deals directly with your company’s revenue. This makes it especially relevant to your new customer acquisition plan since you can see, in dollars and cents, how much you can expect to get from a loyal customer.
2. 2. CLV provides data over time. You can see revenue dips and compare that to customer behavior, such as churn rate, when you have good CLV data. This can allow you to make strategic decisions, such as targeting periods with a subscriber churn with specially-designed marketing campaigns.
3. 3. CLV can help you improve customer relationships. Using the CLV metric can help you understand what customers like. By refining your practices, you can increase the loyalty of your current customers and streamline the process of acquiring new customers, all of which add value and revenue to your company.

There are some limitations to the CLV metric, including:

1. 1. CLV is dependent on products and services. Any brand with potential long-term customers can benefit from knowing their CLV, but it is especially relevant to subscription services and B2B (business to business) companies. Companies that do not regularly offer products will have difficulty compiling and using the data necessary for a solid CLV.
2. 2. CLV produces incomplete information. The CLV does not provide complete information and is most helpful when combined with other metrics, such as the net promoter score (NPS) and the customer satisfaction score (CSAT). These metrics provide additional information about what customers like and dislike and how likely they recommend your product or service to others.
3. 3. CLV can give false predictions. The CLV can provide brands with a false sense of predictability about the future. While past behavior is a good indicator of future customer behavior, other factors can be challenging to anticipate. Overreliance on the CLV can give companies a false sense of confidence about their brand's future or lead them to miss an unexpected opportunity in an emerging market.

Once you’ve made your customer lifetime value calculation, you can work on improving it. Information is powerful, and by applying your data, you can grow your business and increase total revenue.

1. 1. Improve your customer experience. Ultimately, there is no substitute for excellent customer service. By providing the best possible customer experience, such as special perks and responsive customer support, you can significantly increase your likelihood of being favored by customers. Excellent customer service can increase your retention rate and, in turn, your CLV.
2. 2. Learn more about your customers. While the CLV can give you some idea of what customers like about your business, you can learn more through feedback and surveys. It is essential to know about your customers’ journey, from their first impression of the brand to their latest purchase, to understand better your loyal customers and how you can improve your brand.
3. 3. Increase your average order value. Many e-commerce websites upsell and cross-sell their customers, offering bundles with additional items or more expensive options at the checkout. This tactic can help increase the value of each transaction, ultimately boosting the company’s CLV.
4. 4. Offer a loyalty program. Incentives such as special discounts and promotions can build customer loyalty, extend a customer’s relationship with your brand, and increase the amount of money they spend. Loyalty programs can ultimately improve the lifetime value and the value of each purchase.

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