What Is Customer Lifetime Value (CLV) and Why It’s So Important for Your Business

In today’s competitive business landscape, existing customers are the lifeblood of success. According to Semrush, existing customers are 50% more likely to try your business’s new product. These loyal patrons are also 31% more likely to spend more on their average order value with your business.

One of the best ways to unlock the full potential of existing customer relationships is to measure and maximize customer lifetime value (CLV). In fact, 76% of companies agree that CLV is an essential concept in their organization. However, only 42% can accurately measure it.

This article covers everything you need to know about CLV marketing. From calculating customer lifetime value to maximizing the average customer lifespan, we have you covered. Prepare to elevate your business as we empower you with the insights needed to increase customer loyalty and reduce customer churn.

This article will focus on:

• What Is Customer Lifetime Value?
• Why Calculating Customer Lifetime Value Is Important
• Understanding the Customer Lifetime Value Formula
• Historical and Cohort Approaches to Customer Lifetime Value Calculation
• How To Increase Customer Lifetime Value

What Is Customer Lifetime Value?

Customer lifetime value is a metric that measures the total net profit you can expect to gain from a customer throughout their entire relationship with your brand. It considers the customer’s first purchase, repeat purchases and the average duration of their relationship with the company. Instead of focusing on the value of individual transactions, this metric looks at all the possible transactions to be made. 

Your CLV can tell you the following things:

• What does your average customer journey look like?
• Why do loyal customers continue to purchase from you?
• How much can an average customer be expected to spend over time?
• Which products do high-value customers prefer?
• Which products yield the highest levels of profitability?
• Which customer relationships are contributing to the majority of your sales?
• Which clients are the most profitable?
• What is your churn rate?
• How can you optimize customer acquisition strategy?
• How much money can you reasonably allocate to attract new customers and remain profitable?

Leveraging these insights can significantly boost your brand’s profitability and increase customer loyalty. However, knowing the lifetime value of a customer is not enough. You have to use your CLV to shape your customer retention strategies. 

For instance, a high CLV is a sign to keep investing in product development or your customer success teams. On the other hand, a declining CLV might indicate that your latest marketing strategy needs improvement.

Calculating customer lifetime value helps you quantify and increase customer loyalty. If customers repeatedly purchase from you, that usually indicates business success. 

As customer acquisition costs lower, your overall profitability improves, enabling you to optimize your business operations. CLV empowers your brand to shift its focus from mere revenue generation to fostering meaningful, lasting customer relationships.

Why Calculating Customer Lifetime Value Is Important

Determining your CLV gives you valuable insights that could directly impact your bottom line. Here’s what we mean by this:

1. Knowing Your CLV Helps You Earn More Revenue Over Time

Tracking and improving CLV helps boost sales and reduce customer churn. For instance, if your CLV has been consistently low, you might have to start optimizing your loyalty programs or customer support improvements, both of which have the potential to drive faster, more sustainable growth. 

2. CLV Can Help Pinpoint and Resolve Gaps

Using the CLV formula, you can identify and resolve issues and worrying trends. For instance, if you find that your CLV has been consistently low, you might have to start optimizing your loyalty programs or customer support improvements, both of which have the potential to drive faster, more sustainable growth. 

3. Increasing CLV Can Help Reduce Customer Acquisition Costs

It takes more effort to convert a new customer than a loyal one. In fact, the cost of acquiring new leads is five times higher than retaining existing customers (The European Business Review).

Here are common costs associated with lead acquisition:

• Research and Market Analysis: Performing market research and competitive analysis during lead acquisition is key to identifying your target audience, understanding their needs and developing appropriate marketing strategies. Expenses associated with this stage include focus groups, surveys and consulting services.
• Discounts and Trial Offers: While discounts and promotional incentives may easily attract new business, they also come with high upfront costs, such as freebies and product or service samples.
• Events: Marketing events are a great way to introduce your brand to potential customers. However, they can also be costly due to various expenses involved like event space and equipment rental, booth or stand design, hosting and staffing and marketing materials.
• Partnerships and Affiliates: Expenses associated with referral fees, partnership programs, affiliate commissions, or revenue-sharing agreements can quickly add up.
• Customer Onboarding and Support: Ensuring a positive customer experience and facilitating their successful adoption of your product or service also comes with substantial costs. You’d have to spend on training materials, customer support software and support team salaries.

Customer retention strategies are often more affordable, mainly because the consumer already knows and trusts your brand and is more likely to make repeat purchases. Using the CLV formula, you can reduce unnecessary marketing expenditures and drive long-term profitability.

Understanding the Customer Lifetime Value Formula

Below is the most basic customer lifetime value formula: 

Customer Lifetime Value = (Customer Value* x Average Customer Lifespan)

When you calculate customer lifetime value, keep in mind these formulas:

• *Customer Value = (Average Purchase Value x Average Number of Purchases)
• Average customer lifespan = (A customer’s average number of active years / Number of customers)
• Average purchase value = (Total revenue over a set time frame / Number of purchases over the same time frame)

Historical and Cohort Approaches to Customer Lifetime Value Calculation

The historical approach allows you to calculate customer lifetime value based on the total gross profit generated from previous purchases. It offers two methods:

1. By Determining the Average Revenue per User (ARPU)

ARPU = (Total revenue for a chosen period / Number of customers for a chosen period)

2. Cohort Analysis

This customer lifetime value calculation involves determining the ARPU per cohort instead of per user. A cohort is a group of customers with similar characteristics who made their first purchase in the same month in their customer journeys.

Using the cohort analysis as a CLV formula, you gain several critical insights, such as the number of loyal clients, ad campaign performance and the stages where purchasing declines occur.

How To Increase Customer Lifetime Value

Now that we’ve covered the customer lifetime value formula, it’s time to discover which CLV marketing strategies can help you maximize this metric.

1. Listen to Customer Feedback

Listening to customer feedback is the first and most important step in fostering loyalty and driving repeat sales. Reviews provide the following insights:

• What drew them to your brand.
• How they use your product. 
• The key benefits they find most valuable in your product.
• How their experience with your product line has evolved over time.
• Areas they believe could be improved.

Companies with a rock-solid review monitoring and customer retention strategy are ahead in the marketing game. A study shows that 85% of consumers trust online reviews as much as personal recommendations. (BrightLocal)

There are several ways to generate customer reviews. You can use online surveys, feedback forms, focused group discussions and email and SMS campaigns. Businesses that invest in review generation tools and CLV marketing can reduce customer churn and influence purchasing decisions. Additionally, they gain control of online conversations about their brand.

2. Employ Expansion Revenue Tactics

Expansion revenue is the income you generate from selling more to existing customers. There are several methods for upping expansion revenue and lifetime value: 

• Upselling – Encourage customers to purchase a more expensive, upgraded or premium version of their chosen package.
• Cross-selling – Offer complementary products related to the original items the customer intends to purchase.

3. Implement a Loyalty Program

Including a loyalty program in your customer retention strategy can reduce churn rate and lead to sustained business growth. A loyalty program is an excellent way to retain customers, giving them a solid motive to keep buying from your brand. You can offer free gifts, exclusive merch, discounts via a points system and early access to your latest product or service.  

4. Invest in Customer Experience

Improving customer service directly leads to better customer experience. This, in turn, leads to a higher retention rate and customer lifetime value.

Here are several ways you can optimize customer experience:

• Offer Personalized Interactions 

Over 70% of consumers expect companies to deliver personalized interactions, and 76% get frustrated when this doesn’t happen. (McKinsey & Company) Personalized interactions help customers feel valued and drive them further down the sales funnel. 

You can personalize customer experiences by providing prompt and friendly responses to reviews and tailoring your ads and content based on customer needs and preferences. 

• Turn Every Experience Into a Positive Outcome

Improve overall customer experience by providing a range of support channels such as email, phone, live chat or social media. Similarly, promptly addressing customer reviews and concerns demonstrates attentiveness and a commitment to client satisfaction. These proactive measures promote trust and raise the lifetime value of a customer.

Improve Customer Retention and Revenue Growth With Rize Reviews

Tracking CLV helps inform your strategy on retention, lead generation, customer service and even the quality of your products and services. When you calculate customer lifetime value and leverage it to inform your strategy, you position your brand for greater success.

At Rize Reviews, we help you build long-lasting customer relationships that translate to game-changing profits. Our team will conduct an accurate customer lifetime value calculation and help you optimize customer acquisition strategy. With advanced solutions, such as survey campaign management, social media follower growth and review response management, you can improve customer retention in no time. 

Contact us now and let us help you maximize the lifetime value of a customer.