How to Calculate and Improve Customer Lifetime Value (CLTV)?

How to Calculate and Improve Customer Lifetime Value

Let us say that you own nothing but sheep. So one day you are out grazing the flock and all of a sudden, a wolf appears. What are you going to do? You’re going to take care of it, right?

When you market your products on the internet, people will try to cheat you by making deals too good to be real and trying to steal your customers just like the wolf wants to steal your sheep. But no worries!

Use your CLTV to understand how much each of your customers is worth to your business and how much you’d be willing to spend to keep them coming back.

Customer Lifetime Value (CLTV) is one of the most important metrics any business can have. It’s a way to understand how much profit you can expect to earn from a particular customer.

It’s also a way to understand how much investment you need to make to acquire a new customer. Sounds simple, right? Sadly, most businesses struggle with calculating customer lifetime value.

We’ll walk you through the most common mistakes and show you how to avoid them.

CLTV is becoming increasingly important to companies, according to research from Econsultancy. However, the majority are still at the beginning of their journey, with only 1% saying their CLTV approach is mature, and 44% saying it is in development.

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLTV) is a concept that has been around for decades, but it has recently gotten a lot of attention in the marketing and business community. The CLTV is a measurement of how much revenue a customer will bring in throughout their lifetime.

It is an important metric to look at when you are making decisions about which customers to acquire and how much to spend on them.

Calculating CLTV can be difficult because there are so many different types of customers. Some customers will shop with you once, spend a lot of money and never return, while others may buy from you multiple times, but spend less each time.

It’s important to understand how much each customer is worth to you, so you know how much to spend on customer acquisition and retention.

How to Calculate Your Customers’ Lifetime Value?

Customer Lifetime Value (CLV) is an important metric for marketers.

CLV gives a clear picture of the total profit that the company can earn from a single customer and thus helps to identify the most valuable customers. It is an important factor in determining the net profit of a business.

In other words, CLTV is the total amount of money a customer brings to the business. It is calculated based on the amount of money earned from a customer throughout his existence in the system.

The calculated CLTV is a key indicator of the company’s financial performance. It includes the profit generated by a single customer over the period after his/ her first purchase.

CLTV is calculated by using the following formula: CLTV = (S x L x A) / C Here, S = average order size L = average number of orders A = average order cycle time (the time between purchases) C = customer acquisition cost (CAC). 

For example, we can talk about the CLTV of a client who has purchased a mobile phone for $150 (Rs11,252), a laptop for $600 (Rs 45,011), and a tablet for $300 (Rs 22,505). The average cost of purchase for this client is $1,050 (Rs 77,778). If we take into account the average period between purchases, we will get the customer lifetime value. It may be 1.5 years in this case. The customer lifetime value is updated after each purchase of the client.

How important is Customer Lifetime Value?

The CLV is a powerful metric that will help you to increase the value of your customers by – Setting a higher price point for your product or service. Understanding the effort required for acquiring a new customer. Designing a loyalty program that encourages your customers to come back.

The CLV formula is a powerful tool to help you understand :

  • Establish a marketing strategy for your ideal target audience: 
  • When calculating the value of the customer, it is also necessary to know how many customers come back to the business. The return rate of the customers will include the revenue and the profit in the sales of that customer.

    If a company knows how much a customer is worth and how many customers will come back to the business, it will be easy to predict the revenues and profits.

    The reason why this information is important is to determine the marketing strategy of the business.  It would be like knowing that some customers will spend more than just $100 or $1000. Knowing this will enable you to design a unique strategy to acquire customers who will pay the most for your product or service.

  • Customers are more likely to remain loyal to you:
  • If you optimize your customer lifetime value and consistently provide customers with value, in the form of excellent support or a loyalty program, they will be more inclined to stick around than to churn.
    With more loyal customers comes a lower rate of customer churn and an increase in referrals, positive reviews, and sales.

  • Cost of acquiring new customers is reduced:
  • Harvard Business Review states that acquiring a new customer costs between 5 to 25% more than retaining an existing one. A 5% increase in customer retention, however, can yield a 25% increase in profits, according to Bain Company.

    Based on these statistics, your business needs to identify and nurture good, valuable customers since they will be spending more on repeat purchases and keeping you in business. As a result, you’ll see higher profit margins, higher customer lifetime values, and reduced customer acquisition costs.

How to Improve Customer Lifetime Value?

Once you’ve determined your customer lifetime value, how do you increase it? Consider some of the following methods.

  • The beauty of an optimized onboarding process is that it helps lay the foundation for continued interaction, which makes your brand more loyal to your customers. CLV measures the monetary value of a customer acquired through direct marketing throughout their lifetime with your brand.
  • An effective way to increase your CLV is to increase your average order value. Rather than selling customers one product for a fixed price, consider offering complementary products when they are about to check out at the end of their journey using the upsell and cross-referencing method.
  • As your company grows and expands, so can the way you communicate with your customers! Increasingly, people are aware of their options, which makes it necessary to maintain a great relationship with them, because customer lifetime value (CLV) is driven by relationships that require ongoing communication.
  • Lastly, the better your customer service, the higher your CLV. The more personalized your brand is, the more customers will feel valued. No matter what product you provide, people will always seek out ways to spend their money with a company that treats them well.

In a world where you’re either growing or dying, it’s important to find ways to add value to your customers. Yet many businesses don’t realize that by applying a few simple strategies to their customer service, they can increase their profits.

For more information on how to improve your CLTV, contact DialDesk today!

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Author Profile

Varuna Raghav
Varuna Raghav
As a CX and marketing specialist, Varuna Raghav has more than 15+ years of experience to her name. Her enriching input has been valuable to the brands and organizations she's worked with.

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