Customer Lifetime Value (CLTV) – What Is It And How To Accurately Measure It?
Numerous parameters help you determine the success of your brand. Customer Lifetime Value, along with other metrics such Customer Acquisition Cost (CAC), Repeat Purchase Rate (RPP) & Monthly Recurring Revenue (MRR), help you to assess the growth and profitability of your business. Companies that pay close attention and acknowledge the needs of their repeat customers tend to have better retention rates, and subsequently better profitability. CLTV is a tangible revenue metric that helps you to understand customer behaviour and create a more agile digital marketing strategy.
What is CLTV?
Customer Lifetime Value (CLTV) is the prediction and evaluation of the generated revenue expected from a customer over a period of time. CLTV is an important parameter because it allows a greater understanding of a customer’s overall value to the brand. CLTV helps you to calibrate business strategies to acquire new customers, and retain your existing customers.
For any business to be profitable, CLTV must always be higher than CAC. Customer Acquisition Cost or CAC is basically the number of resources spent to acquire new customers. It is always more expensive to acquire new customers than to retain existing ones. Therefore, elevating the value of your existing customers is an important factor for driving growth and profits.
Why is CLTV important?
Most businesses tend to focus on customer acquisition rather than customer retention and end up spending most of their budget on CAC. But to enhance profitability, companies need to either reduce CAC or increase CLTV. It is often easier to incentivize existing customers than to entice new customers.
The saying goes that 80% of your revenue comes from 20% of your customers. This 20% of customers represent the most loyal of your target audience. Statistically, the probability of marketing your product or service successfully to new customers is only 5-20%, whereas for existing customers it’s 67%. Understanding and tracking CLTV will help your brand to gain insight into what’s the driving factor behind your loyal customers, and how to get more retention rate out of prospective customers.
How to calculate CLTV?
The basic formula for calculating CLTV is:
CLTV= AVERAGE ORDER VALUE * GROSS MARGIN * AVERAGE CUSTOMER LIFETIME
Average order value is the average revenue you expect to gain per customer.
Gross margin signifies the ratio of total revenue to cost of goods sold, subtracted by the cost of providing service.
Lifetime represents the average customer lifetime value.
How to improve customer lifetime value?
Understanding customer needs
For businesses to truly serve their customers well, they need to understand consumer needs and intent. It is important to nurture your existing customers. Reaching out to customers can have a positive impact and help to build a positive brand experience. This is essential because most companies see a significant drop off in the first and second purchase. Building relationships with customers will help you increase customer retention and enhance CLTV.
Personalised purchasing experiences catered to a customer’s unique preference, are essential to build brand loyalty and convert customers to be repeat customers. Analysing customer’s purchasing history, and customising their user experience, can help businesses boost their consumer base. Businesses need to use digital analytics and empirical data to ensure their websites and apps are optimised, to meet the demands and queries of their customers.
Excellent customer service
If you intend to retain customers, it’s important to focus on elevating your customer experience. Businesses need to invest in a customer experience management program to ensure that they deliver exceptional service to each consumer every single time.
Loyalty programs are a great way to incentivize regular customers with discounts and offers. These programs encourage high-value customers to purchase more to gain more rewards. A well-executed loyalty program can extend brand loyalty and improve retention rates.
Replenishment campaigns can dramatically improve user engagement. Personalising the campaign with dynamic content provides the opportunity to give your customers more alternatives and options based on their individual preferences. These campaigns can drive up user engagement by 50%.
Cross-selling campaigns are effective in adding more value to your customer relationships and increasing revenue. Recommending additional products to your customer, that aligns with their purchase history and personal taste, helps to enhance customer lifespan.
Businesses that proactively seek to enhance their customer experience for loyal customers are likely to see higher CLTV and higher profits. Mapping out, and measuring customer feedback of all vital key points, can help you to develop better strategies to improve customer retention. We highly recommend reading the Wiki article on CLTV as well. At Alkye, we offer customer experience management services that can help you enhance your brand’s user experience and extend brand loyalty.