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Wed Nov 13 2019

Understanding Your Customer Lifetime Value

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Why should you understand customer lifetime value (CLV)?

Whether you are a manufacturer that sells products or a service provider that specialises in their field, everybody knows the crucial importance of customer satisfaction. According to research conducted by the Temkin Group, companies can boost revenue by as much as 70% over 3 years just by enhancing their customer experience.

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Modern business is about much more than closing a one-time deal with your client. As consumer-centric companies continue to scale, the importance of cultivating a loyal customer base has grown drastically over the years.

Businesses are still governed by important metrics. And one of the most important metrics when it comes to consumer satisfaction and loyalty is customer lifetime value (CLV).

What Is Customer Lifetime Value?

As the name suggests, the customer lifetime value (CLV) is a metric used to denote the overall amount of money a business can earn from one customer throughout their lifetime. Basically, it analyses a customer’s revenue value for the company and then equates that to the lifespan of the customer, as calculated by your organisation.

Why Is It Important?

By placing a carefully estimated valuation on the consumer’s worth to the company, this metric can help identify consumer demographics and segments that can provide the company with the greatest ROI.

This metric is comprised of two key components that form the cornerstone of every organisational agenda:

  1. The expected purchase amount per consumer
  2. The course of their relationship with your business

What Is It Used For?

By allowing an insight into what an organisation can expect to earn from one customer over their lifespan, CLV can be used to gauge your customer support team. After all, customer support executives play a vital role in ensuring that consumers continue to engage with your organisation throughout their lifetime.

How To Improve Customer Lifetime Value

As one of the most important metrics, organisations are always keen to improve their CLV. Here are the top 3 ways to increase your customer lifetime value:

1. Streamline Your Onboarding Process

From simplifying your product guides to creating highly interactive how-to videos, tailoring your onboarding process can significantly boost your customer lifetime value.

2. Maintain Excellent Customer Service Levels

Having more than one negative customer experience is enough for 92% of customers to abandon a brand. From an omnichannel presence to round-the-clock support, your level of customer service can prove to be a beneficial brand differentiator for your business.

3. Be Proactive About Feedback

Gartner reports that companies with successful customer experience history have always relied on the collection and analysis of actionable feedback from their customers.

Your business should be proactive about feedback across various channels (review sites, website, social media reviews, and comments). But you should also invest in the creation of highly actionable feedback forms, like survey forms sent via email.

Calculating Customer Lifetime Value – How Do You Do It?

As a complex calculation, the customer lifetime value factors in multiple variables. After all, calculating a customer’s worth for your company for the entirety of their life isn’t going to be simple.

To determine the CLV you need to ascertain the average purchase value (APV) and multiply that with the average purchase frequency rate (APF). This will provide with you the customer value.

The next step entails multiplying that customer value with the average customer lifespan (ACF). Easy, right? Let’s use a case study to understand it better.

We will be using a Kissmetrics report on Starbucks as an example. The report, which deals with the concept of customer lifetime value, analysed the figures from a specific franchise. They measured the purchasing habits of five customers on a weekly basis and calculated an average, for each of the required values in this calculation.

1. Ascertain The Average Purchase Value (APV) For Your Business

Let’s start off with an easy one. Taking data from the report, the average buyer spends $5.90 per visit.

For your business, you can ascertain this value by adding up the total spend by a customer during all their visits in a week (or month) and then, dividing that by the number of their visits. For greater accuracy and a more representative sample data, repeat the same process for multiple customers.

Once you have the APV for multiple customers, just add the values and divide them with the number of customers that you observed.

2. Determine The Average Purchase Frequency (APF) Of Your Consumers

Once you know how much your average customer is buying from you, it’s time to find out how many times they visit your store.

This is an important part of calculating how much the customer will be worth to the business. The more they shop, the higher the value and vice versa.

In the above-mentioned report, the average purchase rate for the five customers was 4.2 times per week.

3. Deduce The Average Customer’s Value For Your Business

We have already calculated how much the average customer buys per visit and the frequency of their visits to the store against a specific time period. This should make it easy to calculate the average customer value, but it’s not so simple.

It’s important to note that this is the ‘average’ customer value and therefore requires a more holistic view of things.

To accomplish this, we analyse all of the sample customers individually and then multiply each individual’s APV with the APF for each of the sample participants.

Then, we add all individual values and average them out to arrive at our average customer value. For the Starbucks franchise monitored in the report, this value was $24.30.

4. Determine The Average Customer Lifespan

This is basically the calculation of the sum of years that every customer has visited your business or store.

The report doesn’t go into detail of the calculation behind the lifespan for Starbucks consumers, but they do list the value as 20 years.

Rationally, calculating the average customer lifespan requires you to observe how many years each customer has visited your business. But this can be a little impractical.

One easy way to calculate the average buyer lifespan is by calculating your churn rate. Once you have the percentage, divide 1 by that value.

5. Finally – Evaluate Your Customer’s Lifetime Value

Finally, we are one step away from calculating the customer’s lifetime value. Here’s how to go about it:

Take the average customer value and prorate it on an annual basis. Since the Kissmetrics report measured everything on a weekly basis, we will calculate it by 52 – the number of weeks in a year. That gives us a value of $1263.6.

Take the prorated annual customer value and multiply it by the average consumer lifespan. In this example, we multiply $1263.6 with 20 years. This brings the customer lifetime value for that specific Starbucks franchise to be $25,272.

By following the same steps for your business, you can easily calculate a customer’s lifetime value.

Determining Customer Lifetime Value
The five steps to determining Customer Lifetime Value for your business

Customer Lifecycle and Customer Lifetime Value – How Do They Work?

The customer lifecycle is an illustration of the journey a customer undertakes as they progress through a company. From discovering the brand, to educating the consumer about it, and all the way to post-purchase engagement – all of these stages are a part of the customer lifecycle.

But, how does it link with your lifetime customer value?

As a strategic overview of the entire consumer journey with your company, the customer lifecycle provides an insight into the various stages that the consumer has to go through before deciding on a purchase.

This allows you to touch the various consumer pain points, what the triggers are behind their purchasing behaviour and most importantly, how to cultivate a feeling of loyalty. This indirectly has a lasting influence on your customer lifetime value because the stronger your post-conversion service remains, the better your consumer loyalty, and the higher your consumer lifetime value.

As one of the core metrics in the fields of consumer satisfaction, the consumer lifetime value should headline your organisational efforts. As UX continues to become a key deciding factor, every organisation should strive to achieve a higher customer lifetime value.

If you’re not actively trying to improve your customer lifetime value, it’s time to start. Contact us today for a rapid 30-min strategy call and see how we can help you manage your lifelong customers.

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