The simplest definition of a growing business is when the customers keep coming back for more. Throughout different stages of a growth journey, a business gains and loses customers. But great products and services keep customers satisfied yet willing to buy more.
This appetite for more adds value to the seller over time during his relationship with the customers, which is also known as Customer Lifetime Value.
Customer lifetime value is a key metric measured by every growing company. It helps the business owners understand how long it takes to regain the amount invested in earning a new customer (including sales and marketing costs).
If you want to acquire as well as retain valuable customers for your business, you must know about various facets related to customer lifetime value and how to calculate it.
What is customer lifetime value? – definition with example
Customer lifetime value, also known as CLV or CLTV, is a business metric that indicates the total worth of a single customer to a business throughout their business relationship. In simpler words, it represents the total amount a customer is expected to spend on the products/services offered by a business.
It is indicative of the profit margin your business can expect to earn from an average customer over the course of the business relationship. It must account for various expenses, including the cost incurred for sales and marketing, operational expenses, customer acquisition costs, and the amount invested to manufacture or procure products.
Given below is a simple example to help you understand customer lifetime value –
A local coffee shop has an average sale of Rs. 200 per customer. If a typical customer visits thrice a week, then his customer lifetime value will be:
CLV per month = Rs. 200 (average sale) x 3 (per week visits) x 4 (number of weeks in a month) = Rs. 2,400
If it costs more than Rs. 2,400 to the coffee shop owner to acquire a new customer, he could be losing money unless he reduces the acquisition cost.
Why is customer lifetime value important for businesses?
There are many reasons why knowing customer lifetime value is essential for your business.
CLV affects revenue
The customer lifetime value helps identify specific customers that provide a significant part of the revenue during a specific period. This way, you can focus more on these customers with products/services they like to make them happier, making them spend more money on your business.
It boosts customer retention and loyalty
When you optimize CLV and keep on providing value through your products, services, and customer support, you will most likely witness an increase in customer retention and loyalty. The more loyal customers you can have, the lower will be the churn rate, which is followed by higher sales, positive reviews, and higher referrals.
It reduces the costs of customer acquisition
By knowing how much you will earn from a typical customer, you can optimize the customer acquisition spending to ensure that your business attracts the right type of customers and maintain high profitability.
It helps grow business with improved forecasting
Customer lifetime value forecasts can help you make forward-looking decisions for the business in terms of staffing, production, and inventory. These forecasts allow you to avoid overspending or underspending money unknowingly.
With the right understanding of customer lifetime value, you will also get the answers to the following questions:
- Which products have the highest profit margins?
- What kind of products do the customers with high CLV want to buy?
- Who are your most profitable types of customers?
- How much should you spend to acquire a customer and maintain a profitable relationship?
Advantages of addressing customer lifetime value
- Improved customer retention and reduced customer attrition
- Repeat sales
- Higher profitability
- Smooth upselling
How to calculate customer lifetime value – CLV formula
Customer lifetime value is simply the product of customer value and average customer lifespan. In terms of a formula, it can be written as:
Customer lifetime value = Average value of purchase x Number of purchases x Average lifespan of a customer
Another formula for customer lifetime value calculation in terms of revenue is:
CLV = Customer revenue – (Cost of acquisition + Cost of serving a customer)
How to improve customer lifetime value
Now that you know about CLV and the steps involved in customer lifetime value calculation, how will you improve it further? Here are ten tips that can help.
Optimize onboarding process
Customer onboarding, when done right, motivates the prospects to come back and buy your products/services time and time again. This will ultimately increase the customer lifetime value.
Never over-promise and under-deliver
Another way to increase CLV is to over-delivering the benefits to your customers beyond the brand promise. This is much better than making bold claims and then failing to deliver what is expected.
Increase the average order value
A smart way to improve customer lifetime value is to increase your average order value.
Recommended Read: Average Order Value – Why It Matters for Your Online Business
Build strong relationships with customers
Making a customer loyal to your brand goes beyond just fulfilling a need. This requires you to build relationships with customers using social listening, asking for their feedback regularly, sending rewards, and hosting local events.
Improve customer service
Most people consider customer service as a factor before selecting a brand to buy from. Hence, you should ensure excellent customer service to improve CLV.
Run loyalty programs with exciting rewards
With loyalty programs, you can keep customers engaged with your brand and reward them for frequent purchases. This method of incentivizing customers will increase their purchase frequency and their average lifespan, which will ultimately improve CLV.
Focus on cross-selling and upselling
You can make the customers choose an expense product option or multiple products at once with the help of upselling and cross-selling strategies.
Increase product/service pricing
Increasing the pricing can directly increase customer lifetime value. However, it is important to avoid scaring off buyers with sudden price increases. You can increase prices without losing customers by focusing on delivering unmatched value with your products or services.
Make return requests easy to place
When a buyer is not happy with what is being offered, he should have an easy experience making returns or exchanges with your brand. A simplified return process can make a customer come back and give other products/services a try.
Enable recurring payments with subscriptions
You can ensure the least customer drop-offs during a specific period and maintain CLV by offering subscription-based products. For example, by selling subscription-based products online, you can increase CLV by encouraging the target customers to choose the annual billing cycle.
Enable Paytm Subscriptions for higher customer lifetime value
Paytm Subscriptions is an innovative feature that can help you automate collections from your customers for recurring payments.. The longer the period during which a customer continues to make payments under the chosen subscription plan, the higher will be the CLV.
Given below are a few benefits of Paytm Subscriptions for you and your customers:
- Best suited for all types of businesses – groceries, content subscription, financial services, etc.
- Supports multiple business models – free trials or one-time charge along with automatic recurring payments
- Ease of accepting payments through bank accounts, debit cards, credit cards, Paytm Wallet, Paytm Postpaid, and UPI
- Subscription links to accept recurring payments without having a business app or website
- Seamless payment experience for your customers
- Supports UPI AutoPay via three UPI flows – UPI Intent, UPI InApp, and UPI Collect