What is Customer Lifetime Value? How to Calculate it?

Customer lifetime value (CLV) is a metric that allows you to understand which customers are more likely to purchase, when, and how.  By having a better understanding of CLV, you can increase its effectiveness and increase your overall revenue by putting your focus on the right customers.

What is Customer Lifetime Value?

Marketing guru, Neil Patel, does a great job of explaining what a CLV is and how to calculate it.   He defines it as the amount of revenue you can project that a customer will generate for you based on what they spend now and how long they will be a customer of yours.   It is basically the value for each customer now and in the future and gives you an idea of the maximum you should spend to acquire new customers.

Importance of Customer Lifetime Value

CLV is important because it can help you understand very important financial factors for acquiring and retaining customers.  For instance, it will help you determine how much you can spend on marketing and sales to acquire new customers and still make a decent profit.

It will also tell you how much you should spend on customer service to retain existing customers.  Calculating customer lifetime value will also give you a better understanding of who your most valuable customers are and how to target them in the future to increase sales.

How to Calculate Customer Lifetime Value?

In its most simple explanation, calculating CLV involves adding up the average revenue earned from customers and subtracting the initial cost of acquiring them.  Calculating CLV gets much more complicated than that but is explained in Niel Patel’s infographic nicely.

Tips to Increase Customer Lifetime Value

Your customer lifetime value can always be better.  In order to bring your CLV numbers up, there are certain things you can do.

Tip #1 Successful Onboarding

Making sure your customers have a successful onboarding experience with your product is an excellent way to increase your CLV.  A successful onboarding experience includes introducing them to all of the people or departments they may need to get in touch with to resolve any issues or ask questions.  It also involves thorough demos of your products to ensure quick understanding and adoption.

Tip #2 Create Loyalty Program

A loyalty program will reward anyone who continuously returns as a customer, which is going to be very helpful for your CLV.  Providing a membership fee for free shipping or reduced monthly subscription fees is a good example.  Or you can have options for buying a certain amount resulting in a free product or points for every purchase leading up to deep discounts.

Tip #3 Retarget

Your CLV will help you determine who it is that you should be targeting and allow you to focus on them more than on anyone else.  For instance, Amazon found that its Prime members spend more than twice than non-prime members.  This was an eye-opener for the organization who decided to start putting more effort into those customers re-targetting their efforts to those that are already members.

Tip #4 Manage Customer Relationships

Your ability to manage your customer relationships directly correlates to customer lifetime value.  This relationship starts with the first contact and continues throughout the lifetime of the relationship.

Managing customer relationships in order to increase your CLV may require the assistance of a tool such as a customer relationship management (CRM) solution.  An effective CRM can help you with all aspects of the customer journey and ensuring that they experience your brand at its best.

Achieving Customer Lifetime Value Goals

In order to implement all of these tips and achieve your goals for increasing CLV, employing software such as Agile CRM is ideal since you can input, track, and access all information necessary to calculate and increase your CLV.  Agile CRM offers:

• Enhanced contact management to document all interactions and transactions and segment customers
• Deal tracking to keep track of stages and milestones of your deals to better visualize the sales process
• Marketing workflow automation
• Email marketing and tracking
• Mobile marketing

Implementing such a CRM will help you manage all aspects of your customer relationship aiding your ability to increase your CLV.

Conclusion

CLVcalculator.com explores the many benefits of calculating your CLV and the shift marketing has taken from being an art to that of being more of a science with analytics and metrics.  This realization is a relief to many marketers who want to better understand how to measure their results.

Following the tips outlined here, you can most definitely increase your customer lifetime value as well.  If you would like to see if Agile CRM can help you achieve better CLV, give it a try for free for your first ten users.