Are you a new business owner looking for ways to make your venture long-term and successful? Understanding customer lifetime value is the key to unlocking profits and keeping your business running.
Customer lifetime value (CLV) gives you an idea of how much revenue each customer contributes over their time with your business.
It’s an excellent way to measure your overall performance, identify potential loyalty programs, track the return on marketing investments, and more!
In this article, we’ll take a deeper look into what customer lifetime value means for your business and explore the different methods that companies employ in order to maximize it.
What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) is a metric used by businesses to measure the profitability of a customer or client relationship. CLV is calculated by adding up the present values of all future cash flows associated with that customer.
In other words, CLV measures how much money a business can expect to earn from a customer over the entire course of their working relationship.
There are several different ways to calculate CLV, but they all essentially rely on the same basic principle: your customers can be divided into different groups based on how profitable they are to the business.
The most important factor in determining CLV is how likely it is that a customer will continue doing business with the company.
Other factors that can be taken into account include average purchase size, average purchase frequency, and the length of time a customer has been doing business with the company.
The reason CLV is such an important metric is that it helps businesses determine how much money they can afford to spend acquiring new customers.
A high CLV means that a business can afford to spend more money acquiring new customers, since those customers are likely to be profitable in the long run.
Conversely, a low CLV means that a business should focus on retaining current customers rather than acquiring new ones.
Why is customer lifetime value important?
Aside from the obvious of course (profit), customer lifetime value is important for a number of reasons. We’ll highlight the top three.
First, it helps businesses determine how much they can invest in acquiring new customers. If the cost of acquiring a new customer is more than the customer’s lifetime value, then it may not be worth it for the business to invest in that customer.
Second, it can help you determine which customers are most valuable. This information can help businesses focus their efforts on retaining those customers and maximizing their lifetime value.
Third, it can help you decide how much to spend on marketing and other retention efforts. If the return on investment for these efforts is greater than the customer’s lifetime value, then the business should continue spending money on them.
How can companies maximize CLV?
There are a few things companies can do to maximize CLV. One is to focus on customer retention. According to a study by Bain & Company, increasing customer retention rates by 5% can increase profits by 25% to 95%.
This is because customer acquisition (CAC). If your spending $50 to gain new business / new customer then you must understand your customers lifetime value to help you work out how long it will take you to make back that investment & a better marketing number for the investment of new business.
Food for thought: It costs five times as much to attract a new customer than it does to keep an existing one.
Another way to maximize CLV is to segment customers and target them with individualized offers. This can be done through data analytics, which can identify trends in customer behavior and preferences. With this information, companies can create customized offers that are more likely to appeal to specific customers. This comes down to understanding your customer and what you really offer.
Finally, companies should strive to provide excellent customer service. This includes responding promptly to customer inquiries and complaints, addressing issues efficiently, and providing quality products and services. By providing great customer service, companies can create lasting relationships with customers and maximize their CLV.
What are some strategies that businesses use to increase CLV?
There are many different strategies that businesses can use in order to increase CLV. Some of these strategies include:
1) Increasing customer loyalty: When customers are loyal to a business, they are more likely to spend more money with that business and less likely to switch to a competitor.
There are many ways to increase customer loyalty, such as through rewards programs, providing excellent customer service, and offering unique products and services that cannot be found elsewhere.
2) Focusing on customer retention: It costs much more to acquire a new customer than it does to retain an existing one.
Therefore, businesses should focus on retention by creating a great experience for their customers and ensuring that they are satisfied with their purchase. businesses can also keep in touch with customers after they have made a purchase in order to ensure that they are happy with their purchase and to get feedback on how the business can improve.
3) Offering value-added services: When businesses offer additional services along with the products that they sell, it can help to increase CLV.
These services can be anything from shipping and delivery to installation and setup. By making it easy for customers to buy what they need from one source, businesses can increase customer satisfaction and loyalty while also increasing CLV.
How can you calculate customer lifetime value?
There are a couple different methods for calculating CLV, and it’s not an exact science, but the most common approach is to utilize a simple formula that takes into account average purchase amount, number of purchases, and length of time a customer is expected to remain active.
A business can use CLV to determine how much it should invest in acquiring and retaining customers. For example, if the CLV of a new customer is $100 and it costs the business $50 to acquire that customer, then the business should continue acquiring new customers as long as the CLV is greater than the acquisition cost.
There are several factors that can affect CLV, so it’s important for businesses to track and analyze customer data regularly to ensure they are making sound decisions about where to allocate their resources.
Some things that can impact CLV include:
- Changes in average purchase amount
- Changes in customer retention rates
- Increases or decreases in product prices
- Changes in product market
Overall, CLV is an important metric for businesses to track because it provides an indication of how profitable a customer is over the long term. By understanding CLV, businesses can make more informed decisions about how best to allocate their resources in order to maximize profits.
An example of CLV in the Yard Sign Business
The reason we focus so heavily on storks and selling storks to start ups is because of the lifetime value of that customer. Some may believe this type of business is “too niche,” how often can you have a baby?
Well, this is a loaded question because what if you aren’t really selling to the person having a baby ?
What if your selling to grandparents who could have 1-7 children with a national household average 3.2?
When you begin to realize the true breadth of the market, the picture starts to change.
You can see how targeting the right customer puts you in the trajectory for that return business and life time customer value we explained? Additionally, we have noticed that our return customer base are those celebrating milestones.
Based on the image above, do you understand how grandparents who buy with you are also in the market to celebrate the type of milestones you also sell?
Keep in mind that the average age of becoming a grandparent is 50 years for women and a couple of years older for men. Today’s grandparents may range in age from 30 to 110, and grandchildren range from newborns to retirees.
This is decades of potential shopping for their kids and grandkids.
In fact, “most grandparents have multiple grandchildren with 5 to 6 on average.”
When you look at this in a visual timeline you can see this puts your grandparent market right at the forefront for the milestones your selling!
They are the only generation to have SOMETHING for all these ages. Their parents fall in the 70-100th birthday milestones, their children fall in the 30-40th milestone, they have major wedding anniversaries and retirement not only for themselves but their friends.
Their grandchildren are being born or graduating.
WHY start with the small fish of their children when you can go right for the big kahuna?
The number you need to invest in “parents” vs “grandparents” or a new customer is the same, so why not spend it on the customer with more lifetime value?
How to know if you are on the right track?
Go through your calendar for the last 6 months and look at the ages of those whom you displayed a sign for, do you see the pattern?
Now that you understand your customer , you can better determine their needs.
So if you celebrated a sweet 16, guess what other email list they should go into ? Yes, graduation.
Light marketing for year 1 with a steady increase in contact for years 2 -3 depending on the month of their birthday.
The touch points for your stork customer are so much more with LOTS of built-in customer life time value because of the nature of that time period of life.
Do you want to chat more about this concept?
We’d love to walk through some of your real life questions and examples , you can schedule a call with us here