In recent years, there has been a noticeable change within the marketing landscape. A change in which marketers are putting the customer experience first. This year too, the focus on this is expected to increase. A positive change if you ask us. Fortunately, more and more companies recognize the added value of a loyal customer. More and more companies are therefore focusing on Customer Lifetime Value. But what exactly is it, how do you calculate it and why is it so important?
What does Customer Lifetime Value (CLV) mean?
Customer Lifetime Value (CLV) is a metric that predicts the average individual value of a customer. You can think about the revenue this customer will generate for your company. Customer lifetime value is also important here, because the longer a customer buys from your company, the more his value will increase and the higher his lifetime value will become. It seems like a simple task at first glance, but it is anything but that. In fact, building a large customer base is not that difficult, but making sure that these are valuable customers who are also loyal to your brand is another.
It is important that everyone in the company is aware of how CLV works so that they can all work with it. After all, keeping customers loyal and also satisfied can be encouraged by different departments.
How do you calculate the CLV?
You want to get started with the CLV, but how do you actually calculate the Customer Lifetime Value? We’ll try to explain that to you in a few steps.
Step 1: The average purchase value
You calculate it by taking your company’s total sales from an X period (say two years) and dividing it by the number of sales from that period.
Average purchase value = total sales / number of sales
Step 2: The average purchase frequency
You calculate the average purchase frequency by dividing the number of purchases by the number of purchases made by unique customers in the given period.
Average purchase frequency = number of purchases / number of purchases unique customers
Step 3: Customer value
By multiplying the average purchase value by the average purchase frequency, you calculate the value of the customer.
Customer value = average purchase value x average purchase frequency
Step 4: Average life span of a customer
This is nothing more than the average of the number of years a customer has been buying from you.
Average customer lifetime = average number of years a customer buys from you
Step 5: Customer Lifetime Value
And finally, you calculate the CLV. You do this by multiplying the customer value by the average lifetime value of your customers. By calculating this, you estimate the revenue you can expect from an average customer over the life of their relationship with your company.
Customer Lifetime Value = customer value x average life span of your customers
So actually the CLV is the sales value of a customer during the relationship. Therefore, it makes sense that the longer the relationship with the customer and the company is good, the more often this customer will buy and the higher the CLV will be.
Side note
You can perhaps understand that calculating the CLV is easier for a telephone company, for example, than for a retail company. Consider, for example, a company in the fashion industry. Here the calculation is a lot more complicated. With a telephony company, you actually know over period, what amount is paid by a customer. So with this you can actually say that there is no one way to calculate the CLV. This will differ from company to company.
What can you do to improve the CLV?
Suppose you have mapped out your company’s CLV. Then you would like to know how to increase it, because that way you can ensure that you can get even more value out of your customer relationship. By analyzing the previous steps, you will understand that the CLV improves when purchase frequency is increased, relationship longevity increases or purchase cost decreases. All are achievable through a good customer experience with the company. We are happy to explain this further.
5 ways to increase your company’s CLV:
- Improve your company’s customer satisfaction.
- Increase the quality of your products.
- Choose a loyalty program, such as a savings campaign, member card or loyalty point system.
- Deploy a retargeting campaign to customers who have made a purchase from you.
- Take advantage of the RFM model. This model makes it easy to increase retention and thus increase your CLV.
What may it cost?
The CLV has been calculated, the choices to increase it have been made. Now that you know how to increase your company’s CLV, you can start looking at the costs involved. Because you know what the CLV is, you also have an estimate of the cost of bringing in a new customer. In addition, you may have a better understanding of how much of a discount you can give to a customer who has been inactive for a while. Or how about valuing an e-mail address? All in all, it’s important to make sure you’re not going to incur costs that you can’t ultimately recoup.
Need help improving your CLV?
We hope that you too, if you don’t already, and your company understand the importance of good Customer Lifetime Value. It is not without reason that more and more companies are turning their attention to this and bringing its importance to the attention of their staff. Whether you work in the marketing department or on the store floor, everyone can do his or her part by ensuring that the customer has a pleasant experience with the company.
Need help calculating the CLV for your business? Or would you like specific tips to improve CLV? Our tritonX Success Manager would be happy to help. Contact succes@tritonx.cloud and we’ll be happy to help. The webinar on Tuesday, March 8 at 9:30 a.m. will also focus on CLV.
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