Calculating Customer Lifetime Value (CLV) and Why it Matters!
You have probably heard the saying, “A bird in the hand is worth two in the bush.” Where customers are concerned, this statement is worth remembering. That’s because acquiring customers is expensive, and losing them is even costlier.
Therefore, it's essential to understand the customer lifetime value metric and why it matters to your business.
Let's get into it!
What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) refers to the total revenue your business can expect from an individual customer throughout your business relationship. It serves as an indicator of how healthy your business is and how profitable your clients are. To calculate this metric, you need to know your customer's revenue value and lifespan.
Generally, the longer your client buys from you and the more they purchase, the higher their CLV will be. For that reason, how your sales and customer support reps interact with customers at every buying stage is very important since it influences when they buy and how much they spend.
CLV = Customer Value X Average Customer Lifespan
The customer value formula is:
Customer Value = Average Sale Value X Average Number of Transactions
The average purchase/sale value formula is:
Average Purchase Value (APV) = (Total Revenue ÷Number of Purchases) Within a Specified Period
The average customer lifespan (ACL) formula is:
ACL = Sum of Customer Lifespans ÷ Number of Customers
Why is CLV Important?
Research shows that 75 percent of North American senior executives consider CLV a highly valuable metric. Here's why.
CLV Helps You Understand Your Ideal Customers
Every business has ideal customers, but not all companies know who those customers are. You can determine who your ideal buyers are by comparing the various CLVs across different customer segments.
Once you learn essential details about them, such as their age, gender, career positions, location, and preferences, you can refine your buyer personas based on which customers spend the most. That, in turn, makes it easier to market to more customers with the same characteristics, so you can always sell as much as possible to every one of them to maximize profits.
Pinpoint Bottlenecks Along the Buyer's Journey
You can determine how your sales and customer support reps interact differently with each segment and the bottlenecks in the various buyer journeys.
For example, suppose customers with high CLVs experience more touchpoints and access more personalized content than their lower-value counterparts. In that case, you can personalize the content for other customer segments and increase touch points to improve customer retention and loyalty rates!
Reduce Customer Acquisition Cost
Research shows that your highest chances of selling to a new prospect are 20 percent. And even when you convert one into a customer, it will cost you six to seven times more to sell to that new customer than keep an old one.
You can then replicate the marketing and sales strategies you use on them on other existing segments to lower your customer acquisition costs.
Improve Your Offerings
Once you identify your high-value customer and learn their details, you can also discover what they like about your brand. Also, you can inquire about their pain points or use the feedback they have already provided.
Then, you can use the information to create and personalize content suitable for each customer segment, improve your customer services, and refine your product to address customer needs better. Once you do that, you will have a superior product or service that differentiates your brand from the competition and enjoy a larger and more loyal customer base.
Help Plan for the Future
The more insight you have into your customers, your company will be better off. Learning who your best clients are and what enables them to trust you, can help you understand your customer behavior, changing purchasing trends, and where you should focus most of your marketing and sales efforts to maximize profits.
That knowledge helps you plan for your future since knowing how to assign your future budget and make forecasts concerning company revenue will be easier.
Historical vs. Predictive CLV Models
You can use historical or predictive models to measure the customer life value metric.
The historical model will use your customer's past data to determine CLV without considering whether your existing clients will continue to have a business relationship with your company. You should use this model if your customers interact with your business over a specific period. However, since it ignores inactive clients who may start buying from you again, it can provide inaccurate results.
Alternatively, you can opt for the predictive CLV model, which uses machine learning. Thanks to the latest technological advances, the model is more objective. As a result, it can enable you to understand your most valuable customers and products better and provide insight into what you should do to increase customer retention rates.
With so much information about customers available from various shopping channels, determining the customer's lifetime value can be challenging.
However, if you choose a CRM such as HubSpot, you can integrate it with your existing financial tools, streamline the process of assigning monetary value for each customer, and pay attention to customer feedback, getting an accurate CLV will be much easier. Then, you can refine your marketing and sales strategies and personalize the experiences of each customer segment to improve customer satisfaction and boost revenues significantly.
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