What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) is the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime. This is an important figure to know because it helps you make decisions about how much money to invest in acquiring new customers and retaining existing ones.
For example, the CLV of a Honda owner might be as much as $100,000 if they are happy with their car or minivan choice and end up buying several through the years. Or the CLV of a regular coffee drinker might be even higher than that, depending on how many cups of coffee they drink a day and where they buy it. Conversely, someone who buys a home twice in their life might only be worth, say, $15,000 to a real estate agent, because while the value of the purchase is huge, the percentage paid to an agent is only a fraction of that.
In the big picture, CLV is a gauge of the profit associated with a particular customer relationship, which should guide how much you are willing to invest to maintain that relationship. That is, if you estimate one customer’s CLV to be $500, you wouldn’t spend more than that to try and keep the relationship. It just wouldn’t be profitable for you.
How to Calculate CLV
The simplest way to calculate CLV is:
CLV = average value of a purchase X number of times the customer will buy each year X average length of the customer relationship (in years)
So a marathon runner who regularly buys shoes from your shoe store might be worth:
$100 per pair of shoes X 4 pairs per year X 8 years = $100x4x8=$3,200
And the mom of a toddler might be worth:
$20 per pair X 5 pairs per year X 3 years = $20x5x3 = $300
So who should you be paying more attention to? Clearly, the adult runners in your database.
The Value of Knowing Your CLV
Calculating the CLV for different customers helps in a number of ways, mainly regarding business decision-making. Knowing your CLV you can determine, among other things:
- How much you can spend to acquire a similar customer and still have a profitable relationship
- What kinds of products customers with the highest CLV want
- Which products have the highest profitability
- Who your most profitable types of clients are
Together, these types of decisions can significantly boost your business’ profitability.
Boosting Customer Lifetime Value
Since the odds of selling to a current customer is 60-70%, according to eConsultancy, and the odds of selling to a new customer are 5-20%, investing your resources in selling more to your existing customer base is the key. So what tactics will increase the likelihood of a customer buying more from you? Here are some proven techniques:
- Make it easy for customers to return items they’ve purchased from you. Making it hard or expensive will significantly reduce the odds of them making another purchase.
- Set expectations regarding delivery dates, aiming to underpromise and overdeliver. It’s much better to promise delivery by August 1 and have it in their hands by July 20th than the reverse.
- Create a rewards program to encourage repeat purchases, with rewards that are both attainable and desirable.
- Offer freebies for doing business with you, to build brand loyalty.
- Use upsells to increase the average value of a customer transaction, which is the equivalent of McDonald’s asking, “Do you want fries with that?”
- Stay in touch. Long-time customers want to know you haven’t forgotten them. Make it easy for them to reach out to you as well.
You’ll build a more profitable, successful business by focusing on attracting and retaining long-term customers who will become advocates for you, as well as repeat buyers.