Importance of Customer Lifetime Value
One of the most important things to know about your business, whatever its size, is the customer lifetime value, or CLV.
This is a key metric, because if you understand what your customers are worth to you over time, then you can calculate how much money you can spend to acquire a new one. The CLV is basically an average or estimate of what your customers are worth to you over a period of time. Put another way its the income that comes from a customer minus the cost of getting them in the first place (advertising costs) and serving them.
In many businesses, a customer will purchase more than just once. Ideally, a customer will come back time and time again. They will either purchase the same product or service again or purchase one of your other products. Looking for ways to increase the CLV means that you will make more money from them.
Customer Lifetime Value Example
For example, a client might come to a yoga session and pay £10 for their first class. If it’s good and they love it, they might sign up to a one month package which is £100 for unlimited yoga sessions during that month. At the end of that month, you offer them a 10% discount to join as a monthly member (on direct debit), which is normally £80 but with their discount they pay £72 a month.
They also purchase a special yoga mat and towel. You can see how, whilst the initial purchase of this customer was only £10, over the span of a year, they have become very profitable.
Calculating the CLV for this customer
In this example, the value of this customer in the first year is:
£10 (first class) + £100 (second month unlimited yoga) + £72 x 11 (remaining monthly direct debit payment) + £45 (mat and towel)
Total Income: £947 (hoping I have got my maths right here – I did do an accounting module at uni!)
Obviously, there is the cost of the actual mat and towel to deduct but the rest is all profit. You will also need to deduct any other costs, such as marketing costs to acquire that customer. I know that there is the cost of the studio, the teachers etc. However, these are all fixed costs and an additional student is not going to really impact these. So you can see here that that CLV is quite high for this customer – if only they were all that profitable!
While some customers might only come to one class and never come back, others might come to their first class and keep coming for years. Your ideal customers will not only come for years, but they will attend workshops at weekends, go on your yoga retreats, share your content on social media, and give you 5* reviews. They are the very profitable customers – these are the customers that you want to find more of. As you can see, individual customer lifetime values can vary, so it’s good to work out an average of all your customers.
Calculating CLV for your clients
A simple way to calculate this figure for an individual customer is to look at what they have spent over 12 months or 24 months – whatever you think the average lifetime is. Depending on the size of your business you can keep track of each individual customer and what they are worth to you over time (larger companies will have software that will do this for them). You can then see who are your key or VIP customers, and you can make sure that you look after them accordingly.
Average Customer Lifetime Value
As well as knowing what individual customers are worth to you its good to know what an ‘average’ customer is worth. There are a number of ways of calculating the average CLV. They vary from the very accurate and complicated to the more simple – the latter being my preference. Remember that these are just estimates.
There is a great post here on Hubspot which shows you how to calculate the customer lifetime value. You need to find out a way that is easy for you to do this – don’t spend time worrying too much about the precise measurement amounts, but do have an idea of what that value is. It’s a great benchmark to have.
For example, if like me you have a small number of high paying clients it’s a relatively easy calculation (probably one you can pretty much do in your head if you are happy with an approx amount). However, like the yoga studio example, if you have lots of customers and lots of different products its good to use a proper calculation.
So work out what is the average amount that a customer spends with you over their lifetime of purchasing goods or services from you. It’s also good to work out how long this period normally is – this is the average customer lifespan. Once you have worked out this figure you will know how much you can afford to spend on marketing to get an (average) customer. This is called the CPA (Cost per Acquisition)
Customer Lifetime Value and Marketing Channels
One thing to note is that the CLV will vary depending on which marketing channel your customer comes from. For example, a customer that comes through as a referral from a friend may well have a higher CLV than someone that found you via social media. Some resources show that social media has a lower CLV than other channels but obviously, this will vary depending on the industry and specialism that you are focused on.
It’s worth looking at your own figures and working out which channels work for you. I remember talking to a Pilates studio owner recently, and they were spending all their marketing budget on just one social media channel (with not great results I should add!) Generally the more intent (the further down the purchasing funnel) the higher the CLV.
Increasing Customer Lifetime Value
There are a number of ways that you can increase the CLV. These would include:
- Increasing the price that you charge. (Remember that you can only increase the price if the customer perceives it to worth that value)
- Increasing the frequency with which your customer buys from you (subscription?)
- Making sure that the customer stays with you for longer and therefore buys more over the period of time.
- Up-selling or cross-selling other relevant or complementary products to them.
- Also as per my point above really hone down on your marketing reports and see which channels bring in the customers with higher CLV and then max spend on that channel.
Customer Satisfaction boosts CLV, so make sure that your customers are happy!
Customers with High CLV
Something to think about is how you look after your customers with high CLV. These are your most valuable customers. What are you doing for them to add value and to show them that you appreciate their business? What can you give them over and above what they would expect?
I always have this in the back of my mind. Valuable introductions to potential partners, a marketing book that I think will really add value and be of interest, or some free content research are all examples. In fact, I might even give some free consultancy if I know that it will help them and they need a little bit of extra help. I try to make sure that I am always over-delivering when it comes to looking after my clients, especially those that have been with me a long time. Remember its often easier and more cost-effective to retain customers than get new ones.
Do you want some help with calculating your CLV?
My top tip? Have a think about what you can do to increase the CLV of your clients and make sure to keep track of all your metrics on a monthly basis. Remember that these figures are going to be estimates or averages, but they still give you a much better idea of what is going on than knowing nothing! If you could do with some help calculating the CLV of your clients then get in touch. I love numbers!
