What if we told you that a single individual customer could be worth over $10,000 to your business? Or that a small boost in retention could double your profits?
What if we told you to stop focusing myopically on one-off sales and reap the rewards of ongoing, long-term client relationships?
As businesses, we often get hung up on day-to-day transactions without seeing the lifelong potential in our customers.
In this article, we'll show you how to shift focus to the big-picture relationship with customers rather than the individual sales. You'll learn how to calculate the revenue you can expect over the entire lifespan of your average customer – with an insightful metric called customer lifetime value (CLV).
What is customer lifetime value?
Customer lifetime value is an important metric that customer success teams utilize to understand and improve customer relationships. It refers to the total revenue a company can expect from an average customer over the entire lifespan of their relationship. Calculating CLV enables Customer Success Managers (CSM) to quantify the long-term worth of acquiring and retaining customers.
For a team focused on retention and expansion, understanding CLV is crucial. A high lifetime value signifies that customers find ongoing value in a product or service, which leads to retention and further purchases over time. CSMs can influence CLV in several key ways:
- Improving product-market fit to deliver more value
- Creating educational touchpoints to drive the adoption of new features
- Nurturing customer relationships to maintain satisfaction
But what does the customer lifetime value metric genuinely mean?
Well, for starters, an increasing customer lifetime value shows that a customer success strategy is working. As your team continues providing support and communicating new releases that solve more needs, your average customer will spend more over time and stick around longer. Winner, winner.
Segmenting users by CLV also allows customer success to differentiate and personalize outreach. The highest lifetime value customers can receive more proactive VIP services through monetization. In this way, CLV guides decisions that directly impact revenue growth and churn mitigation. With customer lifetime value at the core of their strategy, customer success has a North Star metric to set objectives around and outperform.
Why customer lifetime value is important
You’d be forgiven if you sneered slightly at its name, “customer lifetime value” – it sounds like a string of buzzwords. After all, “customers” and “value” are the two pillars of any customer-first business. But “lifetime”? It sounds a little Hallmark-y, right?
Jargon skepticism aside, this little metric packs a lot of punch. In fact, customer lifetime value represents a crucial metric that enables companies to make smarter decisions around investing in customer acquisition and retention.
At its core, customer lifetime value quantifies how much revenue can be generated from a customer relationship over time. With this long-term outlook calculated, companies gain an informed understanding of customer profitability. This drives more strategic prioritization of spending on both acquiring and retaining different customer segments.
Knowing the lifetime value levels of current customers provides an anchor point for how much effort and budget should be allocated per new customer brought in.
Acquiring a new customer for $100 makes sense if the CLV in that target market is $500 over several years. Similarly, CLV signals appropriate spending limits for retention programs for various customer cohorts. High lifetime value customers warrant bigger investments into loyalty initiatives and account management teams. Customers with lower CLV still deserve personalization but within tighter budget constraints.
Essentially, customer lifetime value enables companies to match acquisition and retention investments to future payoffs.
Grace Gupta
Why calculate customer lifetime value
There are many perks for calculating customer lifetime value. For one, having an assigned CLV to a client allows a company to determine the long-term worth of this customer.
This enables companies to determine how much should be spent on customer acquisition costs. No company wants to break the bank by overspending on expensive marketing and promotions. They want to acquire customers profitably, and knowing customer lifetime value helps assess this.
4 ways CLV informs customer success decisions
Customer lifetime value has rapidly become one of the most crucial metrics guiding key decisions in customer success.
Optimizing CLV requires understanding how to engage, support, and expand customer relationships in ways that fuel lasting, win-win value. To effectively leverage CLV data, take these four actions to inform customer success strategy:
- Prioritizing resources
- Optimizing renewals
- Enhancing engagement
- Informing processes
1. Prioritizing resources
Customer lifetime value helps identify your most valuable customers. You can then allocate customer success resources accordingly to provide the highest tier of service to the accounts with the greatest potential lifetime value. Rather than spreading customer success thin across all customers, a CLV model allows strategic prioritization.
For example, customers with high purchase frequency or growth potential could receive a dedicated CSM for personalized support.
2. Optimizing renewals
Since the customer lifespan factor significantly impacts CLV, monitoring renewal rates is essential. Low renewal rates will hamper CLV growth and signal churn issues. The customer success team plays a pivotal role in securing renewals through adoption, education, and proving ongoing value. Analyzing CLV trends can identify at-risk accounts for proactive retention efforts.
3. Enhancing engagement
Sometimes, expansion with existing customers gets overlooked for new customer acquisition. However, upselling and cross-selling are faster routes to boosting CLV. Customer success seeks to continually engage accounts to uncover expansion opportunities. This requires intimate customer knowledge of usage trends and emerging needs to provide consultative guidance.
4. Informing processes
Perhaps the customer onboarding process has become stale and worn, contributing to churn. Or a particular training program fails to resonate with users. Declining CLV trends prompt examination of operational processes that shape the experience. Customer success teams are perfectly positioned to diagnose pain points through customer engagement and feedback. They can then advocate necessary process improvements to support CLV growth.
Monetizing customer success
Why else should companies calculate CLV? Well, CLV goes hand-in-hand with segmentation strategies. Knowing which of your customers generate the most value is a canny way to ensure you provide them with the best service. Additionally, knowing which are the most profitable customers opens up conversations around monetizing customer success.
While not applicable to every business, customer lifetime value is an important metric for companies looking to be bought in mergers and acquisitions. CLV is a tangible method of assessing company value; buyers will pay more for companies with higher customer lifetime value.
Teresa Garanhel
Customer lifetime value formula
So, you want to find out how fruitful your customer relationship is going to be? It’s a great question and one that can be solved with a simple formula.
- Determine the average purchase value by looking at total revenue from a customer cohort divided by purchase frequency over a set timeframe.
- Identify the typical customer lifespan or churn rate, which shows how long the average user stays active before leaving.
With these numbers, plug them into the CLV formula:
(Average purchase value) X (Purchase frequency per year) X (Average customer lifespan) = Customer lifetime value
For example, if a client has an average purchase of $1,500, buys once a year on average, and stays for three years before churning, the math is:
($1,500) x (1 purchase) x (3 year lifespan) = $4,500 CLV
To make this calculation process smoother at scale across all customer segments, companies leverage dedicated CLV modeling software.
Solutions like ChartMogul and ProfitWell use historical transaction data to output customized CLV reporting. This eliminates manual formulas by automatically monitoring changes in buying behavior and churn dynamics. The software also helps segment users into tiers based on their predicted lifetime value, enabling more targeted retention initiatives.
Automating CLV not only saves time but provides dynamic insights to build longer-lasting and more profitable customer relationships over time.
Teresa Garanhel
8 ways to increase customer lifetime value
Growing your business through better retention and customer revenue growth should always be a top priority. But how exactly?
Well, we’ve got eight proven tactics to pump up lifetime value…
1. Cross-sell and upsell
Analyze purchase patterns to uncover likely complementary products for each customer. Then, prominently suggest bundles and deals to encourage add-ons at checkout. Big spenders love a VIP offer – grant exclusive trials or discounts on premium tiers.
2. Red carpet treatment
Roll out the red carpet from onboarding to support with white glove service. For top tiers, assign dedicated account managers for personalized guidance. Smaller accounts should still feel special through prompt, individualized interactions.
3. Loyalty perks
Launch a loyalty program that rewards repeat purchases with points towards free gifts, insider webinars, and elite status levels. Spotlight VIP member profiles and nourish top tiers with exclusive content and surprise treats.
4. Listen up
Check the pulse of your customers every quarter through interviews and surveys. You can compensate customers for their time and candid insights by incentivizing surveys. After curating your feedback, make sure you action it by improving products, upgrading features, and tackling glitches.
5. Omnichannel alignment
Interact with customers online and offline through seamless experiences across all touchpoints – website, app, email, chat, social, and brick-and-mortar stores. The benefit of this alignment is that you maintain integrated data and consistent messaging.
6. Build a community
Another great way to foster a positive experience for your customers is to spark connections through forums, advisory groups, and brand ambassadors. You’ll find that cultivating user groups with like-minded customers empowers them to co-create value.
7. Members attract members
With a membership model, you can pay members who refer new customers that convert – either issue account credits, discounts on next purchases, or cash rewards. You can then spotlight referral wins and offer double payouts for upselling new recruits. Not too shabby, right?
8. Appreciation upgrades
Everyone loves an upgrade. You can surprise loyal customers nearing renewal dates with a free extension of current packages or preemptive bump-ups to next-tier plans.
Teresa Garanhel
CLV + CAC: Customer lifetime value and customer acquisition cost
When you talk about the overall value of the course of a customer relationship, you can’t escape comparing it to the initial cost of landing that customer. There’s no way to slice it; customer lifetime value must be analyzed in tandem with customer acquisition costs (CAC) to get the full picture of that customer.
When we talk about CAC, this metric encompasses every cent of the money you plowed into attracting that new customer through advertising, promotions, and special offers. The CLV metric only makes sense when weighed against the upfront CAC spend per customer.
For example, if a clothes store spends over $1,000 in CAC to bring in a customer with a $1,000 CLV, it may lose money overall. The store would need to lower acquisition costs in this case unless it can increase the CLV through retention and engagement efforts. Carefully monitoring CAC is crucial to profitable CLV growth.
Additionally, the cost to serve a customer must be tracked over their lifetime. This operating expense involves order logistics, brick-and-mortar overhead, contact center costs, and more. Businesses can compare serving costs of high lifetime value customers vs. low ones. If the cost to serve an existing customer becomes too cumbersome over time, the business may face declining profit margins despite the customer's initial healthy CLV.
For subscription businesses, serving costs may be front-loaded in the first year of a contract but decrease as the tenure extends. Thus, improving renewal rates lowers the average cost to serve.
TL;DR: Continually tracking CLV, CAC, and cost to serve side-by-side for each cohort paints an accurate picture of customer economics. This analysis ultimately optimizes growth strategies to maximize profitability behind the revenue growth.
FAQs
What is customer lifetime value?
CLV is the total revenue a business can expect from an average customer during the entire relationship. It estimates the financial value each customer provides over time.
Is CLV the same as LV?
In practice, when discussing customer relationships and their value to a business, CLV and LV are generally considered the same. The choice between using CLV or LV often comes down to personal or industry preference for terminology.
The critical concept behind both terms is the importance of understanding and optimizing the revenue potential from business relationships or assets over their entire lifetime, not just at a single point in time.
Why is understanding CLV important for business strategy?
Knowing the CLV helps businesses determine optimal spending for customer acquisition and retention. It also identifies the most valuable customers to focus on. Additionally, CLV enables more accurate revenue forecasting and provides insights to improve products driving loyalty.
How do businesses calculate customer lifetime value?
The basic calculation multiplies average purchase value, purchase frequency, and expected customer tenure. More complex models also incorporate acquisition costs, profit margins, and time value of money metrics.
Does CLV vary significantly between industries?
Yes, CLV varies greatly depending on sales cycles, repurchase habits, and customer retention levels within each industry. Subscription services often have higher lifetime values than big-ticket retailers, for example.
Is it better to acquire new customers or retain existing ones?
Retaining existing customers is more cost-effective and profitable. Increasing retention by just 5% can boost profits from 25% to 95%. Balancing acquisition and retention is best, but the CLV shows focusing on existing customers generates more value.
How do customer feedback and technology impact CLV?
Customer feedback allows businesses to improve products and services, leading to higher satisfaction and CLV. Technology like CRM systems and marketing automation provide insights to better understand customers and optimize interactions to increment lifetime value.
What are the key takeaways for CLV?
The lifetime value metric is essential for customer-centric decisions that increase revenues. It quantifies loyalty and guides profitable growth strategies for long-term success. Mastering CLV management maximizes the value extracted from each customer.
What have we learned?
Well, we've covered a lot of ground on the winding road of customer lifetime value. Hopefully, you've realized CLV is far more than a SaaS buzzword by now – it's a pivotal metric guiding smarter growth decisions.
While the math behind it may appear complex, the implications for your business are simple:
- Quantify loyalty to focus retention efforts
- Balance acquisition costs against future payoff
- Segment users to differentiate engagement
- Continuously listen and improve experiences
- Automate analysis for dynamic insights
See, boosting CLV shows customers you value the relationship, not just the transactions.
The brands that flourish are those who master these human connections and appreciate that CLV is earned through mutual understanding over time. They go beyond surface-level personalization to foster genuine bonds.
So, rather than chasing each new shiny thing, invest in what you have. Optimize for lifetime collaboration, not one-time sales. The rest will follow.
At its core, CLV represents potential. With the right foundation, a single loyal customer can be worth everything. And that's a metric you can take to the bank.
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