Customer Lifetime Value: What Digital Marketers Need to Know

If you’re not calculating the lifetime value of your customers, you’re not getting the whole picture — and leaving ROI on the table. Here’s how to fix that.

Many companies are getting it wrong when it comes to calculating customer lifetime value.

Sure, they may understand the value of acquiring a new customer. But when you only focus on new customer acquisition, you miss the real prize: the lifetime value of that customer.

With any luck, a customer isn’t just worth a single subscription, closed deal, or purchase from your store. The customer journey doesn’t end when they sign on the dotted line.

Rather, it’s better to look at what that customer is worth by the value they can bring through a lifetime interaction with your brand. This could be through additional purchases, annual renewals, or referring others to you.

If you’ve been struggling to reach your overall marketing goals, make sure you’re calculating lifetime value as one of your key performance indicators (KPIs) and optimizing accordingly.

These figures help you determine how much an average customer is truly worth. They can also help inform how much you should budget in order to retain them.

By understanding how long they’re likely to stick with you, you can get a better idea of a customer’s lifetime value. (Image: Unsplash)

What is customer lifetime value?

Customer lifetime value (also known as CLV, CLTV, or LTV) is the value that a customer has for your business over the lifetime of their interaction with your brand.

CLV is calculated using several key factors, including:

How much the average customer spends. Keep in mind that many customers will spend more with your brand if their initial experience is positive. Once they can develop trust in you and the solutions you have to offer, they may be willing to make more big purchases.

How long customers stay with your business and their average relationship lifetime. Customers may naturally move through your business over time: new ones come, old ones leave. By understanding how long they’re likely to stick with you, you can get a better idea of a customer’s lifetime value.

How often customers make purchases. How often does the average customer come back to your business for future needs? In the case of some brands, that may mean monthly purchases, annual contract renewals, or add-on services.

Others may find that a customer visits more or less frequently. The average customer at their favorite restaurant, for example, might come by or place a takeout order once a week. The average customer at a car dealership may only visit once every several years.

Why is a customer’s lifetime value important?

A customer’s lifetime value is important to your business for a number of reasons.

First, data shows it costs you less to keep a current customer than it does to acquire a new one.

Increasing retention by only 5% can lead to as much as 95% more profits. Moreover, even retaining 2% more customers can save you 10% on costs.

Your customers’ lifetime value can help compensate for your customer acquisition cost (CAC). If you’ve noticed your CAC creeping up, looking at a customer’s lifetime value can give you a better idea about what your customers are worth to your business.

This, in turn, can potentially increase your willingness to raise your ad spend.

Instead of focusing on a one-time purchase, CLV measures the long-term value of the potential customer relationship, including:

• Repeat purchases
• Subscription renewals
• Upsells and/or cross-sells

Focusing on CLV can help increase the revenue per customer, allowing you to justify higher acquisition costs and boost your bottom line over the long term.

Further reading: PPC for SaaS: 12 Optimization Tips + Strategies From the Pros

How to calculate CLV

There are two common ways you can calculate CLV: the predictive model and the historical model.

The predictive approach is a bit more precise. It generally looks like this:

(Average purchase value) x (number of times the customer makes a purchase each year) x (average customer lifespan) = CLV

This predictive CLV model involves forecasting by looking at customer behavior to predict what actions they may take in the future.

This formula multiplies average order value, average gross margin, average number of monthly transactions, and average customer’s lifespan in months together. From there, divide that result by the number of clients for that time period to determine potential future revenue.

The historical CLV data method is based on purchases your customers have made in the past. You find this figure by determining a time period. Then you divide your total revenue by the number of customers during that time. This gives you the average revenue per user.

From there, you can multiply or divide it to determine this figure on a monthly or annual basis.

There are other more advanced customer lifetime value formulas as well, if you want more options.

Tips to increase customer lifetime value

As you develop a better understanding of customer lifetime value and its importance, the next step is determining how you can increase to attract more high-value customers.

Increasing customer lifetime value can boost your business’s revenue without substantially increasing your marketing efforts or ad spend.

1. Consider upselling or cross-selling

When customers visit your website, they should not only receive information about the product or service they’re looking for, but about the accessories and additions that go along with it, if applicable.

For example, a customer buying a grill may need a cover, utensils, or propane. Someone who purchased the basic-level tier of your service may be interested in the deluxe or enterprise version as their needs grow.

Consider offering recommended pairings to go with a purchase. These potential upsells could pop up on the product page, as recommendations in the shopping cart, or via email.

2. Leverage retargeting

Consider targeting ads to customers who have already visited your website, or even those who have made a purchase in the past.

You can create retargeting (also called remarketing) ads designed to target the types of products customers have already considered buying or offerings that go along with a past purchase.

Retargeting can keep your business top of mind for those customers and reduce abandoned carts, bringing them back to you when they have another need for products or services in your industry.

3. Prioritize customer service

Your overall customer experience is one of the biggest indicators of whether someone will return to your brand. People want to feel valued and heard. Whether they’re coming to you with a problem or offering quotes of praise, responding in a personalized, respectful way can take you far.

It’s not the presence of a problem that will lose a customer. Rather, it’s how you choose to deal with the situation. That comes through via the quality of the service that you offer to your customers.

Plus, you can repurpose client testimonials for marketing on your website and social media. This makes your clients feel heard and appreciated while helping to boost your credibility.

By empowering your customer service team, you can increase the likelihood a customer will stay with your business, which can ultimately increase lifetime value.

Pro tip: Google Analytics has a CLV report (dubbed User lifetime technique) that will break down customer data about your users’ behaviors “over their lifetime as a customer.”

4. Pair CLV with CAC

Customer lifetime value shouldn’t be measured in a silo. In reality, it can be an even more important metric when paired with customer acquisition cost, or CAC.

To check how these metrics are squaring up, you can consider these CLV:CAC ratios.

4:1 – Invest more in growth opportunities

3:1 – A healthy ratio to maintain

2:1 – Consider revisiting marketing strategies

5. Focus on predictive CLV

While we did mention the two types of CLV formulas, predictive is often the best model to follow.

That’s because it can measure potential factors like purchase likelihood, churn risk, and potential revenue over time.

6. Take advantage of first-party data

CLV relies on data from CRMs and platforms like Google Analytics.

As a result, it’s crucial to have these platforms set up properly and thoroughly, to ensure you have robust, accurate data to work with.

Further reading: Marketing Agency Pricing: How Much They Charge + What to Spend

Common CLV mistakes to avoid

If you aren’t keeping your most valuable customers around, you need to investigate why that might be — and adjust your business model accordingly.

• Not engaging customers after purchase: Some businesses are accustomed to fleeting traffic. It’s normal for most businesses to have one-time customers who come in to fill an immediate need but may not need to use their business again in the future. Most businesses, however, should consider the importance of maintaining loyalty when it comes to your customer base. This makes it easier to bring them back for future purchases.
• Sub-par customer retention strategies: Are you nurturing clients once the deal is closed? Do you have any referral or customer loyalty programs in place? It’s wise to encourage your best customers to refer others or purchase additional items or services to improve retention rates.
• Not focusing on the full customer lifecycle: As mentioned above, acquisition is imperative. But fostering a relationship with existing customers across all of their touchpoints is a more-cost effective way to boost profits.
• Weak onboarding process: Personalization goes a long way, especially at the beginning when you’re building that customer-brand relationship. Go above and beyond from the very beginning, and you may see your churn rate decrease and your purchase frequency grow.

As you develop a better understanding of the importance of customer lifetime value, the next step is determining how you can increase it. (Image: Unsplash)

The takeaway

As you can see, measuring customer lifetime value is of critical importance to your business.

One of the most effective ways to boost yours is by fostering customer loyalty and thinking big-picture when it comes to your marketing — even after the deal is closed or the sale is complete.

By tracking the average lifetime value of your customer segments in real time, you can move towards increasing your understanding of how to reach your loyal customers.

In turn, this can help you better target your ads and understand what your customers need to stick with you over your competitors.

Need help getting a high CLV and taking your digital marketing initiatives to the next level? We’re here to help.

This post has been updated and was originally published in July 2020.