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Zyro Glossary eCommerce

Customer Lifetime Value

What is CLV (Customer Lifetime Value)?

In simple terms, Customer Lifetime Value (CLV) is the projection for what each customer is worth to a business.

Also known as Customer LTV – or ‘Lifetime Value’ – this term refers to the profit a business expects to earn over the entire lifetime of their relationship with a customer. 

CLV will also help a business estimate how much they should be investing into a customer acquisition cost framework to hold onto each customer.

It costs a business less to retain existing customers than it does to attract brand new ones, so maintaining a high CLV can be vital to a business’s success. 

What is CLV used for and why is it important?

Establishing your company’s Customer Lifetime Value can help you determine a number of factors that will influence the future of the business.

You should always be looking ahead if you want to make a profit. Working out the value of your customers is a huge part of this.

By understanding CLV, you will be able to:

  • Understand how much your business should be spending on marketing, both when it comes to new customer acquisition and existing customer retention.
  • Identify your most profitable product areas, based on what your highest-value customers are purchasing.
  • Find where to focus specifically, in terms of both marketing and products or services, when you’re looking to acquire new customers.

How to calculate the lifetime value of a customer

There’s a number of methods you can use to calculate the lifetime value of customers to give the overall Customer Lifetime Value of your business. 

Factors like the way you track data and the goals you have set will have an impact on your customer lifespan calculations. 

Be realistic about the size of your business and data metrics in order to find the most helpful Customer Lifetime Value formula. 

Broadly speaking there are a couple of key models you could use to calculate CLV:

Historic CLV

This simple model is based on the sum of profits from an average customer’s individual transactions with your business.

While it’s relatively easy to calculate, because you’ll own the sales data needed for the calculation, the historic model can be hard work to keep up-to-date as you’ll have to refresh each number with each transaction.

Here’s the formula to calculate CLV using the historic model:

Historic CLV = (transaction 1 + transaction 2 + … + last transaction) * average gross margin

Predictive CLV

This model is more detailed and uses extra data to forecast the spend and value of an average customer. 

It’s tricky to perfect this model because all the factors it calculates are prone to fluctuation, like market value, pricing, and customer spending capabilities.

Here’s the formula to calculate CLV using the predictive model:

Predictive CLV = ((average monthly transactions * average order value) * average gross margin) * average customer lifespan

How to increase your Customer Lifetime Value

Ultimately, you want to focus on lowering your churn rate in order to boost your overall Customer Lifetime Value.

Churn rate refers to the number of customers who move away from your business, for example by canceling a subscription service or switching to products from a competitor. 

Here are a few tips to increase your CLV and get your customers to stick around:

Welcome new users

Whether your customers have just purchased a service from you, or they’ve taken the small first step of signing up to your mailing list, make them feel acknowledged.

Onboarding new customers in the right way will eventually pay dividends for your overall Customer Lifetime Value. 

Imagine signing up to use a new company and not getting any acknowledgment from them – not even a thanks. You wouldn’t feel bad about abandoning them in future.

Start small, with a simple and automated email to new sign-ups. Then think long-term for nailing that CLV. What would help make a new customer stay with you?

Setting out a roadmap is a great method for ensuring customer retention. Be upfront in showing a new customer the value your business can give them:

  • Send out a welcome email, detailing all the first steps that new customers could take to start using your service in a way that suits them.
  • Follow up after a customer’s first week, giving a little more info on what other features or updates they could utilize to enhance their experience.
  • Be transparent about your plans, so that all your customers can see what’s going to be new and exciting a few months down the road.

Offer incentives

Brand loyalty takes time and effort to achieve, but it can be the greatest way of boosting your company’s Customer Lifetime Value if you get it right.

Customers love knowing that they’re being rewarded for shopping with a company, and that reward goes far beyond simply receiving a great product. 

If you are able to offer your customers something else in return for their purchases, it’s a great move for supercharging your retention rates and overall CLV.

It also demonstrates that you understand the value of a customer to your business.

Incentives could provide the draw needed to pull a customer back in as they start to drift away from you. If you notice that they haven’t purchased in a while, why not dangle a reward in front of them? 

To spike your CLV, you could offer incentives in the form of:

  • Occasional discount codes sent out via email. Businesses often mail out discounts to dormant customers or those who have something sitting in their wishlist.
  • Loyalty programs, so customers can earn points for every purchase or work towards receiving a free gift – this is a great way to extend CLV.
  • A promotion for members – incentivize customers to sign up for a higher-tier account with your business, and offer perks that the average customer can’t access.

Lower acquisition costs

Reducing the spend on finding new customers – often called Customer Acquisition Costs or CAC – can leave your business wide open to growth.

It sounds counterintuitive, but a high customer acquisition spend will reduce your overall profit margins, and it takes focus away from your loyal existing customers. 

So by lowering your CAC you can boost your Customer Lifetime Value, as you’ll be more laser-focused on this aspect of your business.

There’s a number of ways to drive down your customer acquisition cost to up your CLV, and a lot of it is trial and error. 

Here are a few ideas to get you started:

  • Refine your buyer persona so you can identify your most ideal prospects, and you can target all your marketing efforts in the right direction. You’ll want to avoid wasting time on the wrong platforms or campaigns, and a buyer persona will help.
  • Work on constructing a slick USP – or ‘unique selling proposition’. You will have considered this when starting your business, but be sure to constantly revisit your USP and refine it into a clear message that you can focus on.
  • Test, test, and test again. Make sure your marketing funnel is seamless. Check that your website is flawless. Can anything be improved? Of course it can, but you’ll never know if you don’t keep testing throughout the lifetime of your business.

Increase customer spend

It may sound easier said than done, but there are some tried and tested techniques for boosting the average transaction value of your customers.

If you review the formulas for working out Customer Lifetime Value, you’ll see that transaction value is a vital component. By increasing your average spend, you’re increasing CLV.

Other than blindly inflating your prices, which will probably alienate your customers, there are some more indirect ways to up the average spend and accelerate your CLV.

Think about what kind of strategy would work best for your business. Depending on what it is that you’re selling, you could:

  • Capitalize on a ‘freemium’ model. This is a great tactic for boosting CLV: offer your service for free so that tentative new customers can use it, become enamored by it, and choose to pay for the next tier of service to open up new features and perks.
  • Offer add-on purchases at checkout. Similar to how physical stores put buckets of little pick-up products by the tills, you can build in an add-on feature to suggest further products as your customer approaches payment. Just don’t overdo it.
  • Offer an incentive. If you can afford to promote free shipping, or extra loyalty points, or a discount for purchases over a certain spend, make use of these incentives to boost purchase value. It doesn’t sound like it will work, but it does.

Be communicative

A relationship goes both ways, and if a customer is investing time and money in your business, you should identify the customer value and invest in them.

Maintaining an open channel of communication is a nice way to boost your Customer Lifetime Value. You’re demonstrating that you care about customers and helping them to see a personality beyond the product or service you offer.

Be aware that there is such a thing as too much communication. You don’t want to annoy your customers by being omnipresent – it’ll only drive them away and minimize your CLV.

There are methods to staying proactive in your dialogue with existing customers. Depending on what tone of voice you have chosen for your brand, communication could be a defining feature of your business.

It pays to keep it relatively personalized and tied into the customer’s actions. Here are some ideas:

  • Help customers to leverage what’s available to them. If you offer a service but notice a customer isn’t making the most of it, email them with a friendly list of pointers.
  • Use your post-purchase ‘thank you’ email to give suggestions on how to style the product the customer has just bought.
  • Give dormant customers the option to opt-out – this can actually benefit your Customer Lifetime Value, as you can focus your efforts elsewhere.

Be multichannel

Sure, it sounds annoying to have a business in your face, all the time. But it can really help you to stay relevant if you make your company more prominent in your customers’ lives.

Make use of all your channels to ensure customers are consistently aware of your brand and what you can offer them. 

You’ll need to work on giving customers value for their efforts in following your social media accounts and watching your content, but increasing brand awareness is great for boosting your Customer Lifetime Value.

With smart attribution modeling and an understanding of your target audience, you should be able to identify where your customers are and what kind of information they like to absorb from other channels.

Don’t forget that by working out your CLV you should also have a much clearer idea of where to dedicate your marketing efforts.

Here are some ideas for exposing customers to your business on different channels:

  • Run events solely on specific platforms, like a series of ‘meet the maker’ videos on Instagram, to encourage customers to follow you here and receive daily updates.
  • Encourage each customer to share a photo of their latest purchase on their own social media account, tagging your brand, to drive awareness.
  • Provide a highly communicative and personable service on a platform like Twitter or LinkedIn, to drive consistent customer engagement.

Analyze churn 

It will happen – you can’t hold onto every single customer you acquire.

While you don’t want customers to leave your business, you can make the most of those hopefully rare moments. You’ll end up improving your Customer Lifetime Value, too. 

Analyzing churn as it happens can help you identify exactly when a customer starts to disengage.

This can give some interesting insights that will help drive key elements like marketing efforts and product innovation.

Once you have a clear understanding of when and why churn happens, you can identify which business activity should be improved or even stopped altogether.

Do customers find your follow-up emails annoying? Are you offering too many freebies at the start of a customer’s journey with you? 

There’s a number of ways that you can work to figure out that moment where a customer decides that you’re not the one.

It’s best to make the effort throughout the average customer lifespan, rather than trying desperately to salvage a relationship when it’s already too late:

  • Make sure you’re frequently asking for feedback. Try to eliminate any frustrations and add value to your service. Target pools of customers with quick surveys or by asking for ratings on a service or product that they have paid for.
  • Check that you aren’t giving away all of the perks of your business as part of an introductory offer. If a 30-day free trial is all a customer needs to make the most of your service, is it worth doing at all?
  • Send out a limited-time freebie to a lapsed customer. This is a great way to pull back someone who seems to be on the brink of no return. Why not try out this marketing move once you’ve identified the point where churn happens?

Written by

Author avatar

Olivia

Olivia is a writer for Zyro and an eCommerce know-it-all. Having spent many years as a retail buyer, she loves writing about trend forecasting, brand building, and teaching others how to optimize online stores for success. She lives in London and spends a lot of time exploring the city’s parks with her whippet.

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