Customer Lifetime Value: What Is It & How Can You Increase It
If you want to grow your business, it’s not enough to work to drive in customers for a single purchase. You must work to get customers to visit again and again. You must work to increase customer lifetime value.
What Is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) is the total revenue that comes from an individual customer. It’s the amount of money that a customer will spend at your business over the course of their lifetime of doing business with your brand.
How to Calculate Customer Lifetime Value
To calculate customer lifetime value, use the following equation. You will need three datasets to help you fill in the equation.
Customer Lifetime Value Formula
Customer Lifetime Value
=
Average Purchase Value
X
Frequency of Visits (Per Year)
X
Customer Lifespan (In Years)
Average Purchase Value is the average amount of money spent by an individual customer during a single visit. With the right business data, you can track this number for each individual customer. Or, you can find an average purchase value for your entire customer base by dividing your company’s annual revenue by the number of purchases for the year.
Frequency of Visits is the number of times that a customer buys from your business within a specific timeframe. You can also track this by individual customers with the right data. Or, you can find this number by setting a timeframe (such as a year). Then, take the total number of transactions in that year and divide it by your total number of unique customers.
Customer Lifespan is the number of years that a customer continues to do business with you. To find this number, calculate the average length of time between when a customer makes their first purchase and then stops buying from your brand.
As you can see, having the right data is essential for figuring out customer lifetime value. If you aren’t tracking average purchase value, frequency of visits, or customer lifespan, you won’t be able to determine an accurate customer lifetime value.
Related: Need Help Making Sense of Your Business Data and Analytics? We Can Help.
Customer Lifetime Value Example
For an example of customer lifetime value, imagine a quick-service restaurant where the average customer spends $12 per visit and visits 20 times a year. The customer would spend $240 a year. If they continue to visit the restaurant over five years, their customer lifetime value would be $1,200.
$1,200 Customer Lifetime Value
=
$12 (Average Purchase Value)
X
20 Visits Per Year (Frequency of Visits)
X
5 Years (Customer Lifespan)
Why Does Customer Lifetime Value Matter?
Knowing your customer lifetime value helps you make a variety of informed marketing, product, and business decisions. You can make plans based on concrete data, instead of hunches.
Knowing your customer lifetime values allows you to:
- Identify valuable customer segments. When you can track CLV on a customer level, you can identify your most valuable customers. You can identify the people who are most loyal to your brand and create marketing campaigns designed to target those customers.
- Determine a reasonable customer acquisition cost. When you know how much value each customer brings to your business, you can determine a reasonable cost to acquire that customer. For example, if you run a spa with a customer lifetime value of $3,000, it would be reasonable to pay $300 to acquire that customer.
- Improve forecasting. Knowing what to expect from your customers helps you know what to expect from your business. You can use CLV to help you set better and more accurate projections for the future.
How to Increase Customer Lifetime Value
To increase customer lifetime value, you can increase any one of the metrics used to calculate your CLV. Boosting the performance of one or all of the metrics (average purchase value, frequency of visits, and customer lifespan) can help your brand make more from each individual customer.
Improve upsells and cross-sells. To increase CLV, increase average purchase values. Develop upsells and cross-sells that offer incentives for customers to increase the value of each one of their purchases. Use personalization and marketing automation to create targeted upgrade offers for existing customers.
Increase customer retention. To increase CLV, increase the lifespan of each of your customers. Use lifecycle marketing and create customer loyalty plans to help you learn about your customers so you can better cater to their needs and wants and give them a reason to come back to your brand.
Increase customer satisfaction. To increase CLV, increase the number of visits for each customer. Boost customer satisfaction so customers are eager to return to your business. To increase customer frequency, collect feedback and listen to your customers so you can get to know what changes they’d like to see and how you can better serve them through new products and services.
Track your data. The best way to improve customer lifetime value is to have the right metrics to understand your customers and their purchasing behaviors. Boosting CLV will always start with having the right consumer data to tell the right story. Every other effort to increase your CLV will be better when you have data to inform your marketing, product, and sales decisions.
Related: Reduce Customer Churn & Keep People Coming Back to Your Business
Boost Customer Lifetime Value to Grow Your Brand
Brands with a high customer lifetime value thrive. They aren’t constantly scrambling to drive in new customers and keep up revenue. Instead, they form lasting connections with customers who continue to support the brand for years to come.
If you’re struggling with increasing your customer lifetime value -- or worse, you don’t know your customer lifetime value -- MyArea Network is here to help.
Data is at the core of everything we do, and we love help brands track and extract the data you need to determine your customer lifetime value, and then use the information to develop plans to extend your customer lifespan and boost the amount of money that each customer spends with your brand.
Learn more by requesting your free consultation with one of our marketing experts.
