The market is very competitive. It is not enough to merely sell but to retain customers throughout the business. You need to retain customers and increase their lifetime value (CLV) for long-term growth and profitability. But what exactly is CLV? In this blog, we will give you a quick understanding of CLV, its importance to your business, and how you can calculate it.

For customer experience (CX) professionals, understanding and leveraging CLV can make the difference between good and exceptional service. 

What is Customer Lifetime Value?

Customer Lifetime Value (CLV) represents the total revenue a business can expect from a single customer over the duration of their relationship. It’s not just about immediate sales but also about the potential for crossselling, repeat purchases, and loyalty-driven referrals.

By focusing on CLV, businesses can:

•  Prioritize high-value customers.
•  Make informed decisions on strategic marketing expenditure.
•  Improve customer retention percentages.
•  Drive profitability over the long term.

Why is CLV Important for Customer Experience Professionals?

For CX professionals, CLV provides insights into how customer experience initiatives impact revenue. A higher CLV often reflects better customer satisfaction and loyalty, underscoring the value of exceptional CX strategies.

Key benefits of tracking CLV:

1. Strategic budget allocation: 

CLV results help CX teams understand which customer has the potential to be a part of their long-term relationship. So you can direct marketing efforts towards those customers for cross-selling. They are the customers with higher lifetime value. 

2. Enhanced retention strategies: 

Customers with higher CLV values can bring more profitability. Focus on a specific customer base to increase revenues and build on the existing relationships.

3. Informed product development:

Publish customer feedback campaigns and gather feedback in product functionality from time to time. People with higher CLV values can offer serious feedback since they are a part of the regular users. Most consumers who have been long term customers can assess product improvements due to their long-term usage metrics. 

4. ROI measurement: 

Marketers can make direct inferences on customer experience initiatives by relating it to the customer’s CLV scores. Better CX protocols can improve CLV values. 

How to Calculate Customer Lifetime Value

The Customer Lifetime Value calculation has a straightforward formula:

CLV = (Customer Revenue Per Purchase) × (Purchase Frequency) × (Customer Lifespan)

Breaking down the formula:

Customer revenue per purchase: The average revenue generated per transaction.

Purchase frequency: The number of times a person buys within a specific timeframe.

Customer lifespan: The average duration of the customer-business relationship.

For example:

A customer has the following statistics with a company. 

Average revenue per purchase: $50

Average purchase frequency per year: 4

Average customer lifespan: 5 years

Then, CLV = $50 × 4 × 5 = $1,000.

This means each customer is worth $1,000 over their lifetime.

1. How to increase the Average Order Value (AOV)

• Offer bundle deals or discounts for purchasing multiple items. Marketers can also implement tiered pricing or offer premium options. This can encourage people to spend as per their purchasing capacity. 
• In an ecommerce set-up, product recommendations can encourage customers to add more to their cart. Free shipping thresholds can motivate customers to increase their order value to qualify for free shipping
• Festive season or flash sales can create a sense of urgency and drive customers to increase their expenditure.    

These strategies can help businesses increase their average order value and maximize customer lifetime value.

2. How to improve purchasing frequency

• Encourage customers to subscribe to regular deliveries especially for grocery items. This not only ensures a steady stream of revenue but also creates convenience for the customer. 
• Offer personalized recommendations based on past purchases. Assess customer data and provide targeted product suggestions that will resonate with the individual’s preferences.
• Offer promotional offers and seasonal discounts to motivate repeat customers. 
• Use targeted marketing campaigns across omnichannel networks to promote brand awareness. Take constant feedback at various purchasing touchpoints to ensure that people are happy with what they receive 

Advanced approaches to calculating CLV

For businesses seeking a more precise measurement, predictive CLV models can have variable as follows:

• Churn rates
• Discounted cash flow (DCF) for future revenues
• Customer acquisition costs (CAC)

These models help businesses forecast future CLV more accurately, especially in dynamic markets.

What is Customer Acquisition Cost (CAC)

CAC involves measuring the cost of acquiring new customers through marketing activities. This includes expenses such as advertising, sales commissions, and marketing campaigns. To calculate CAC, divide the total acquisition costs by the number of new customers. 

It’s important to monitor and analyze CAC over time to identify trends and optimize marketing strategies. Additionally, compare the two metrics to

• Assess the profitability and 
• Sustainability of customer acquisition efforts. 

The relationship between Customer Acquisition Cost (CAC) and CLV

Calculate the average CAC for different marketing channels. This allows marketers to assess the expected lifetime value of customers acquired through various channels. Optimize marketing strategies to prioritize channels with higher CLV/CAC ratios. It’s crucial to continuously monitor and adjust marketing spend based on CLV/CAC performance, as well as target customer acquisition efforts towards high CLV segments.

Practical Applications of CLV

 1. Segmentation and personalization

Segment buyers based on their CLV scores and create marketing efforts accordingly. For example:

• High CLV customers: Offer exclusive loyalty programs or VIP perks. Focus on a niche of products that a brand can provide. 
• Low CLV customers: Focus on upselling or increasing purchase frequency with better deals when feasible. Brands can offer products in ranges that can be affordable for a larger buyer base. 

 2. Retention over acquisition

Research indicates that retaining an existing customer is 5–25 times more cost effective than acquiring a new buyer. Use CLV insights to:

• Focus on improving retention efforts for high value customers.
• Address pain points that may indicate churn.

Create customer feedback campaigns that can collect direct feedback from the users. 

 3. Informed marketing spend

Align marketing budgets with CLV and ensure optimal ROI. For instance:

invest more in acquiring customers likely to yield high CLV. Direct marketing expenditure from low CLV customer segments to high CLV segments.

 4. Customer centric product development

Use CLV data to identify trends and preferences among high-value customers. You can gather insights on product improvements or people who are looking for future upgrades and innovation.

How to Increase Customer Lifetime Values?

 1. Deliver exceptional customer experiences

Customer experience is a brand differentiator. Satisfied customers are more likely to remain loyal, spend more, and recommend your brand to others.

Actionable Tip: Invest in personalized interactions and proactive customer support.

 2. Encourage repeat purchases

Increase purchase frequency by offering subscription models, loyalty programs or timely reminders and promotions. Even if the purchase value is small, focus on better post-purchase experiences. This can encourage people to spend more on a high-value product. 

 3. Up-sell and cross-sell

Introduce relevant and related products or services to enhance customer value.

For example, if a customer buys a phone, offer accessories like phone cases, chargers or ear buds. You can pair items and offer promotional offers to encourage purchase. 

 4. Focus on customer retention

Common retention strategies include regularly engaging with customers through personalized content across various channels. Focus on channels that your customer base actively uses. For example, occasional promotional initiatives via messenger platforms. Additionally,  resolve issues promptly to build trust and loyalty.

 5. Leverage data analytics

Use data analytics to predict customer behavior and preferences. Identify customers who are at risk of churning. Identify the root cause (such as poor customer service or failed product performance) and reengage them proactively.

Common Mistakes to Avoid When Using CLV

1. Ignoring customer segmentation: 

Creating uniform marketing strategies for the entire customer base can reduce the effectiveness of CLV strategies. It can affect marketing budgets that were allocated only for a high CLV user base. 

2. Overlooking customer acquisition costs: 

Focusing solely on revenue without accounting for acquisition costs can distort CLV calculations.

3. Neglecting churn rates: 

Failing to factor in churn can result in overly optimistic CLV estimates.

Conclusion

Customer Lifetime Value is more than just a financial metric; it’s a powerful tool for understanding and enhancing the customer journey. 

By implementing the strategies and avoiding the pitfalls outlined in this guide, you can unlock the full potential of CLV and create exceptional customer experiences. Sign up for a 14 day free trial with Merren to create custom interactive campaigns for your customers.