Gaining new customers isn’t the only way to improve your business — your existing clients are an underrated revenue source.
Customer retention is an excellent method to increase customer lifetime value (CLV). Generally, the longer customers stay with your company, the more value they create (and larger order amounts).
CLV shows how much revenue an individual or groups of customers can generate through your relationship with them.
So let’s get into how CLV plays into sales and marketing campaigns and how to calculate it.
What is a Good Customer Lifetime Value (CLV)?
In simple terms, a “good” CLV is a dollar amount that proves a customer’s value to your company’s profit. And like revenue, the bigger the number, the better.
On the seller’s end, a good CLV includes the following:
- Personalized customer experience
- Rigorous onboarding processes
- Deep understanding of pain points
- Relevant and valuable content
- Thorough A/B testing
- Responsive customer support
- Ability to provide feedback
- Flexible billing options
- Consistent upselling and cross-selling
- Steady price increases
- Loyalty programs
- Competitive renewal rates
How Do You Maximize Customer Lifetime Value (CLV)?
Building closer relationships with current customers is the basis of maximizing your CLV. And this requires your sales and marketing teams to prioritize retention strategies over acquisition strategies.
But if lead generation and acquisition are still necessary for your company, consider investing in self-servicing for your customers. For customers that want to skip face-to-face purchase meetings, self-servicing saves a little of your resources and budget.
Sales and marketing teams must collaborate in order to calculate CLV and implement retention strategies. In fact, 87% of sales and marketing leaders agree that collaboration between both teams enables business growth.
Customer Lifetime Value Formula
You don’t need a graphing calculator to find CLV, but it’ll require some customer data and a little brainpower.
Specifically, you need the following data points to calculate CLV:
- Distinct time period(s) — or total tenure for an individual account
- Total number of orders placed in that time period or tenure
- Number of unique accounts
- Total revenue within your chosen time period or individual’s tenure
- Average retention period of all or multiple accounts
For this CLV calculation, we’ll use an example with multiple accounts and with an individual account.
The steps to find CLV involve calculating separate values until we get to our end result — let’s dive in!
1. Average Purchase Frequency
Average purchase frequency is your total number of orders placed by all or multiple accounts, divided by the number of unique accounts.
So let’s say all of your customers (150) placed 500 orders. Divide 500 orders by 150 customers. The end result represents orders placed per customer.
500 / 150 = 3.333 (repeating)
2. Average Sale Value
Average sale value is your company’s total revenue from all or multiple accounts (or an individual account), divided by the number of orders placed by them.
Suppose that your revenue is $3 million from 150 customers. Now divide that by 500 orders. The result equals revenue made per order.
3,000,000 / 500 = 6,000
For an individual customer, let’s say your revenue is $150,000 and number of orders is 45:
150,000 / 45 = 3,333
3. Customer Value
Customer value is your average sale value multiplied by your average purchase frequency. For an individual customer it’s average sale value multiplied by total orders, multiplied by tenure.
6,000 x 3.333 = 19,998
Let’s assume your individual customer has been with you for 2 years:
3,333 x 45 x 2 = 299,970
4. Average Lifespan
Average lifespan is the average amount of time (in years or months) customers stay with your company. Any digital tool with advanced analytics (like a CRM) can display this kind of data.
So for this example, let’s say you find your average customer lifespan is 3.2 years.
5. Customer Lifetime Value
It’s the number we’ve all been waiting for!
Customer lifetime value is your customer value multiplied by average lifespan (or actual lifespan, individually). The end result is valued in dollars.
For our multiple accounts example: 19,998 x 3.2 = 63,995
For our individual account example: 299,970 x 2 = 599,940
Increase Your Revenue by Boosting CLV
Company growth starts with offering value to your accounts through data analysis, planning, and personalization.
Focusing on better relationships increases lifetime value for your customer-based revenue goals. And calculating your CLV is a great method to start improving those relationships.