Numerous metrics and parameters play a pivotal role in monitoring the performance of your products and services in the customer marketplace. With the field of Data Analytics gaining popularity, many companies are coming up with innovative solutions for their products and services to gain the majority of the customer share in the market. These metrics will help them seamlessly manage this process. Each metric has its own responsibility, but together they play an important role in determining the company performance. One such metric that primarily focuses on customers is the Customer Lifetime Value.
The Customer Lifetime Value metric is one of the most important metrics when it comes to measuring the importance of your customers associated with the products and services you offer them. It is also a major factor to consider for a growing company. Simply put, if you want your business to acquire and retain a large number of customers, then it is paramount that you understand the Customer Lifetime Value metric, how to calculate it, and its importance for your business.
This article provides you a comprehensive guide on the Customer Lifetime Value metric. It gives you a brief introduction to the metric, how to calculate it, and the importance it has for any business. Furthermore, it also explains the models and formulas present in the metric and the steps you can take to increase your revenue once you have calculated it. Read along to find out how you can leverage this metric to gain valuable insights from your customers.
Table of Contents
Introduction to Customer Lifetime Value Metric
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The Customer Lifetime Value or CLV is the metric that determines the total revenue a business can expect from a single customer that uses the product or service provided by the business. It emphasizes the importance of a single customer over an unlimited period as opposed to when he/she first purchased your product. This metric considers the customer’s revenue amount and compares that to the company’s predicted customer lifespan. Businesses use this metric to determine which groups of customers are most valuable to them. The longer a customer spends his time and money on a company, the more his CLV index grows.
This metric is mostly monitored by the Customer Support and Sales team of an organization. These are the teams that can influence customers to stay with the company for a longer period of time. Customer support managers play a vital role in solving any customer issues and ensuring all their business requirements are met. By doing so, Customer Loyalty increases, and the Customer Churn Rate decreases.
The Customer Lifetime Value can be calculated by multiplying the Average Order Value, the Purchase Frequency, and the Average Customer Lifetime. The Average Customer Lifetime depends on other parameters that will be discussed in the upcoming sections. This formula is depicted in the below figure.
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CLV can be measured by taking care of the below points:
- Identifying the touchpoints where customers create value in the products or services you offer.
- Integrating the records to create your customer journey.
- Measuring the revenue at each touchpoint.
- Adding the lifetime value of each customer.
To learn more about other metrics that can affect your Marketing campaigns, click this link.
Measuring Models of the Customer Lifetime Value Metric
In general, there are 2 models that companies use to measure the Customer Lifetime Value of the company. They are given below:
1) Historical Customer Lifetime Value Model
The Historical CLV model relies on historical/past data to predict the value of each customer without considering whether the existing customer will continue with the company or not. In this model, the Average Order Value is used to determine the value of your customers. This model is preferred to calculate CLV when most, not all, of your customers interact with your company.
Some problems with this model are the fact that as you consider only the average order value, active customers might become inactive and skew your data and inactive customers might start investing in your products and will be overlooked.
2) Predictive Customer Lifetime Value Model
The Predictive CLV model predicts the CLV based on the current purchasing patterns of new and existing customers. Using this model helps you understand your most valuable customers, which product or service is bringing you the most sales, and how you can improve your customer retention strategies.
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Important Customer Lifetime Value (CLV) Formula Components
Now that you know all about CLV and the ways you can incorporate it into your organization, it is now time to understand some of the other parameters needed to help you calculate the CLV. Some of those parameters are:
1) Average Purchase Value
The Average Purchase Value is a metric that measures the average value of each purchase made by your customers and compares it with the average number of units per transaction. It is determined by dividing your company’s total revenue in a certain period by the number of purchases made during that time period.
It is depicted by the below formula:
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2) Average Purchase Frequency Rate
The Average Purchase Frequency Rate is the number of times a customer buys your product/service from you. It is calculated by dividing the number of orders in a certain period by the total number of unique customers in that given period.
It is depicted by the below formula:
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3) Average Customer Lifespan
The Average Customer Lifespan is the average number of days between the first order and last order for all your customers. It is calculated by adding all your customer’s lifespans and dividing them by the number of customers.
It is depicted by the below formula:
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4) Customer Value
Customer Value is the perception of what a product or service is worth to a customer compared to the other alternatives. It is a way of measuring whether a customer got the desired benefits from the product or service he bought from the company. It is calculated by multiplying the average purchase value by the average purchase frequency rate.
It is depicted by the below formula:
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Advantages of Customer Lifetime Value
Now that you understand how CLV works, it is now time to understand what benefits it brings to your organization. Some of the benefits of Customer Lifetime Values are:
- Directly proportional to the revenue you receive: CLV directly identifies the customers that contribute the most to your business requirements. This way you can cater the most to these customers and make them happier, which results in them investing more money in your company.
- Improves customer loyalty and satisfaction: When you constantly improve your Customer Lifetime Value, you increase your customer loyalty and satisfaction rates. This way, you will have a lower Churn Rate which will increase your referrals, positive reviews, and sales.
- Target your ideal customers: By optimizing your CLV, you can segment your customers into different categories thereby catering to each group’s needs in a personalized manner. This will also help you identify the customers that will invest the most in your business and you can build a Customer Acquisition Strategy specific to them.
- Reduces customer acquisition costs: Retaining a customer is a tougher job than acquiring a new one. By improving your CLV, you can do a better job of keeping your valuable customers, thereby reducing your acquisition costs.
Steps to Increase your Revenue using Customer Lifetime Value
Now that you have understood the importance of the Customer Lifetime Value, it is time to incorporate it into your organization. You can follow the below steps to increase your revenue by monitoring the Customer Lifetime Value:
Step 1: Delivering Targeted Content using Customer Data
As you will be receiving data from multiple sources about your customers, you need to pay attention to them to take care of Marketing segmentation and messaging. To do this and deliver targeted content for your users, you need to unify and centralize your customer data to get a single view of your customers.
Once you do this you can build more granular segments to better interact with your customers and cater to all their business needs. Once all your data is in one easy-to-access place, you can make informed decisions on how customer behaviors impact your purchase decisions.
Step 2: Personalizing your Messages
Personalized Messages are a pivotal way to ensure that your customers are constantly interested in your products. Customers will lose interest in your ad campaigns and website if what you offer doesn’t interest them. That is why Marketers who observe and track individual customer behavior tend to send personalized messages to their customers.
Step 3: Using Every Channel to your Advantage
Customers shop on multiple channels and although you have one successful channel to make your revenue, you cannot rely on that alone. As customers use multiple channels to purchase the same product, you need to project your product/service in a catchy and informative way across all channels. This will drive more traffic to your website or ad campaign. Think of all possibilities to reach your customers, such as Social Media, Push Notifications, and Paid Ads. Just as buyers would never restrict their shopping to one platform (either Online/Offline), there’s no reason why you should silo your customer engagement to only one channel.
For example, if your buyers aren’t responding to Social Media, maybe it is time to invest more heavily in other channels to grab their attention. Regardless of where you reach your customers, segmentation lets you see which of your high-value customers are engaging on which channels, helping you invest more of your time on the ones that matter most. By investing across multiple channels, you make your product stand out on all channels, thereby being noticed by multiple eyes to visit your website and purchase your product.
Thus, by following these steps after determining your Customer Lifetime Value, you stand a better chance to leverage this metric to bring in more revenue for your organization.
Conclusion
This article provided a comprehensive guide on the Customer Lifetime Value metric. It provided you with a brief overview of the metric, the models it is built on and the important formulas used to calculate it. Furthermore, it also gave the important steps to increase your revenue using CLV and explained its importance for any organization. It also listed down the steps that you can use to increase your revenue after calculating the Customer Lifetime Value. Overall, the Customer Lifetime Value metric plays an integral role in enhancing the relationship between the customer and your product. By having a strong foundation built using this metric, you can cater to all your customer’s needs proactively and in a seamless manner.
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