Customers bring value to a business. A customer who buys from you one time has less value for your business as compared to one who keeps coming back for repeated purchases. The frequency with which a customer buys products or services from a company, and the extent of brand loyalty his/her buying behavior displays determines that customer’s value for your business.
Customer lifetime value is an important concept that all marketers and businessmen must understand. Your customers need to be taken care of so that their lifetime value increases. Offering good customer service, giving precise product details, and selling good quality products are among the key strategies a business needs to adopt if it wants to enhance the lifetime value of a customer.
What is Customer Lifetime Value?
Customer lifetime value can be defined in theory but is actually a statistical term. It is one of the key statistics that a business needs to keep track of, as part of its customer experience program. Customer LTV measures how valuable a particular customer is for your company. It is not only determined by the sales value that they bring to your business, but also includes factors such as their communication patterns with you, any referral marketing or affiliate program they participate in, their continuity and frequency of purchasing from your company, and the general word-of-mouth that they spread about your brand.
All the marketing efforts of a company are actually part of LTV marketing, which means they are geared towards increasing the customer lifetime value of all your valued customers. The lifetime value of a customer is not just calculated on their purchase-by-purchase basis. They represent the customer’s whole relationship with your brand.
For example, a customer might purchase 6 or 7 sets of clothing from a particular boutique on a certain day, but not come again to buy any more from that boutique for the next year. On the other hand, another customer regularly visits the boutique and buys 1 or 2 sets of clothing from there every other week. The latter customer in this case will have a higher customer lifetime value for this boutique.
In the simplest terms, customer lifetime value is the overall worth the customer gives to a business. Enhancing the lifetime value of a customer helps you to achieve sustainable business growth. Knowing your average customer LTV enables you to develop effective strategies for more customer acquisition and higher profits margins.
Customer lifetime value is different from NPS (Net Promoter Score). NPS is only for measuring customer loyalty. There is another metric called CSAT (Customer Satisfaction) that solely measures customer satisfaction, and is directly linked to the revenue that customer brings. CSAT is mostly determined through customer feedback. Customer LTV is the overall metric that encompasses both these other metrics and goes even beyond.
It is usually only worthwhile to do customer lifetime value calculation if the customer has been in touch with your business for over a year. In other words, it is a great metric to apply to your business decisions if you have many customers with whom you have a multi-year relationship.
At the opposite end of customer lifetime value is the customer acquisition cost. CAC (customer acquisition cost) is the amount of money you have to spend to get a new high quality, loyal or long-term customer. When your customer LTV is higher than your customer AC, your business can achieve what is called all-star customer success.
To understand this better, let’s take the example of a coffee shop. Let’s say the average customer LTV of a coffee shop is $900 and it costs the business around $950 to get a new customer (via direct marketing, sales offers, digital advertisements, billboards, etc). This means this coffee chain will keep on losing money unless it either increases its average customer lifetime value or reduces its average customer acquisition cost.
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There is another element in the equation as well. In a coffee shop business, there is a cost to serve each customer. This cost forms a major part of the business’s operations and cannot be denied. It involved everything that’s done to get the coffee to the customer, such as the overhead costs incurred at your retail outlet, logistics and order management, customer services, and so on.
If your customer lifetime value is high, the operation costs and customer acquisition costs don’t matter. But if your customer LTV is low, then every other cost becomes a burden on the business.
The Importance of Customer Lifetime Value
A high average customer lifetime value benefits a business in many different ways. Here we will discuss a few of them.
1. Reduced Marketing Costs
It costs less to a business to retain its existing customers than to attain new customers. For retaining existing customers, all you usually need to do is provide very good customer service, including post-purchase customer support. If you are running a business online, you can offer instant customer support in the form of a live chat feature installed on your website. We at Strikingly offer 24/7 live chat support to our customers so that nobody’s queries are left unanswered for too long.
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2. Resonance with the Market Trends
If you are able to maintain a high customer lifetime value, that means you are up to date with the changing market trends and are resonating well with your audience. If the market choices change but your business does not adapt to them fast, your customers will possibly start switching to your competitors and your customer CLV will go low. This will indicate to you that you are not fully updated about the trending products and current market dynamics. In order to avoid this, it is helpful to conduct a competitor analysis for your business from time to time.
If you are running an online business and making sales through a website, it also helps to keep a track of your website statistics. Usually, if your sales are going down, that would mean your customer lifetime value is also probably going down. If you build a site in Strikingly, you can view in the Strikingly analytics the number of people who visited your site on any particular day.
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3. Mapped Milestones of Business Growth
If you keep calculating your customer lifetime value every year, you will be able to observe where your business stands in terms of its growth at the end of each year. The customer LTV can determine and map different milestones in your business’s growth. If your customer lifetime value was lower at the end of last year than at the end of this year, that means your business has shown growth in terms of its brand equity, and most likely also in terms of its sales revenue. On the other hand, if your customer lifetime value is reduced during this year, that means your business did not do too well this year. This is a sign that you need to take corrective measures and consider redesigning your marketing strategies.
One way to find out if your customers are losing interest in your brand is to regularly collect customer feedback. If you mainly run your business through a website, the increase or decrease in the number of subscribers to your website might also indicate the rise or fall of your average customer lifetime value.
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How to Calculate Customer Lifetime Value?
There are a few different ways for customer lifetime value calculation. The simplest way is a customer lifetime value formula that is based on a historical model. The customer LTV is equal to the total worth or value of each transaction times (multiplied by) the average gross margin of your business.
For instance, one customer visits your brand website 10 times. Each time, he spends $10 on your site. The average gross margin is, let’s say, $5, after accounting for all the advertising and marketing expenses that are consumed on average to get a customer to make a purchase on your website. Therefore, this is how you will calculate your customer lifetime value:
10 (number of purchases) x $10 (value of each purchase) x $5 (average gross margin)
If you want to get a bit complex, you can use more data points for your customer lifetime value calculation. Here are the data points:
- Average transactions per month
- Average value/worth per transaction
- Average time duration (in months) for which the customer stays loyal to your brand
- Average gross margin
Now multiply all these together and you will get your predictive customer lifetime value.
Now you know that it is neither difficult to keep track of your customer lifetime value nor difficult to calculate it. It is a valuable metric that every businessman should keep an eye on because ignoring it could lead to unpredicted losses and potential damages to your business.
If you build and run a website in Strikingly, you will be equipped with so many website features that it will be easy for you to focus on extra metrics like the customer lifetime value calculation. To create a website in Strikingly, sign up for your free Strikingly account today!