Data Analytics

How to Calculate Customer Lifetime Value

Do you know which customers are the most loyal to your business? Which customers generate the most revenue? The customer lifetime value (CLV) metric can give you insight into these questions and many others.

Once you’re up to speed, you’ll be able to use CLV data to make better decisions about your sales and marketing investments.

What Is Customer Lifetime Value?

CLV, sometimes referred to as LTV for lifetime value, is a metric that represents how much money you can expect a customer to spend on your goods or services during their lifetime.

For example, a gym owner may expect that members who have renewed their membership multiple times are likely to renew again. Depending on factors like members’ ages, the owner can estimate CLV to forecast revenue for the coming years.

CLV can give you big-picture insights into your customer relationships, allowing you to see which relationships are worth nurturing. Customers with low CLV may not be worth as much time or financial investment, while loyal customers may represent significant potential profit.

Why Is Customer Lifetime Value Important?

One of the most significant advantages of calculating CLV is that this information can help you segment your customers in useful ways. For example, you may find it beneficial to segment customers into groups based on profitability and then look for similarities among the members of each group.

This valuable information can help you decide where to spend your marketing resources or what changes you should make to your next product design or software deployment.

Identifying loyal customers can pay off significantly. Over the past several years, market research has made it clear that satisfying current customers is usually a better investment than acquiring new ones. According to marketing guru Neil Patel, it costs five times as much to acquire a new customer than it does to retain an existing one.

How to Calculate Customer Lifetime Value

You may feel a bit overwhelmed when you consider how many steps are involved with calculating CLV, but don’t worry. If you take it one step at a time, you’ll have no problem.

There are several popular approaches business owners take to calculate CLV. One of the most straightforward strategies includes the following steps:

  1. Average Purchase Value (APV): Divide your total revenue for a specific time period by the total number of purchases made in that period.

  1. Average Purchase Frequency Rate (APFR): Divide the number of purchases by the number of unique customers who made a purchase in that period.

  1. Customer Value (CV): Multiply the average purchase value by the average purchase frequency rate.

  1. Average Customer Lifespan (ACL): Calculate an average of the number of years a customer continues spending money on your goods or services.  

To complete one final step, multiply customer value by average customer lifespan. This figure represents the revenue you can reasonably expect the average customer to generate for your business throughout their relationship with you.

Expressed as a formula: CLV = customer value X average customer lifespan.

How to Improve Customer Lifetime Value

As you’ve probably figured out, the key to increasing CLV is to capitalize on customer behaviors to create a base of loyal, repeat customers.

In a way, working to improve CLV is an exercise in getting back to the basics—it’s Marketing 101. Happy customers are paying customers. Your job is to figure out how to make your customers happy.  

Focus on Customer Satisfaction

Business owners work to improve customer satisfaction in countless ways. Try not to get too overwhelmed by the possibilities. Focus on a few overarching principles that impact customers’ satisfaction throughout their purchase journeys.

This list, inspired by a recent blog post by the customer relationship management (CRM) powerhouse Shopify, is a good place to start:

  • Invite customer feedback and take it to heart.
  • Be proactive instead of reactive when there’s a problem.
  • Be honest and straightforward with your customers and staff.
  • Work to understand your customers—business intelligence tools can help.

Focus on Customer Loyalty

Creating strong loyalty and rewards programs is one of the most impactful ways to build customer loyalty. More than 70 percent of recently polled consumers cited loyalty programs as a meaningful part of their brand relationships.

Beyond structured loyalty programs, you can foster customer loyalty more subtly by leveraging customer behavior data. Zero in on profitable, loyal customers and reward them in unexpected ways—like offering exclusive discounts and special treatment like shorter checkout lines.

Improve Customer Lifetime Value With Data Insights

Now that you understand CLV's importance, how to calculate it, and how to improve it, you’re sure to be rewarded with increased revenue.

To benefit even more from CLV and other key performance metrics, take a deeper dive into customer behavior data. Peel’s Shopify analytics tool empowers business owners to connect with customers on a whole new level, helping to bolster your bottom line in many ways. Learn more and try Peel for free today.

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