Customer Lifetime Value (CLV) – why is it so Important?

One of the most important things to know about your business, whatever its size, is the customer lifetime value, or CLV. This is one of the key metrics, 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.

In many businesses, a customer will purchase more than just once. Ideally, a customer will come back time and time again and either purchase the same service or purchase a different one from you. I can’t think of many instances in the health and wellbeing industry where a client might only purchase once, other than for example an appointment with a specialist doctor, who once they have given you the all clear, never needs to see you again. Most practitioners in the health and wellbeing industry have the opportunity to sell to the same client time and time again. It helps if their marketing is good, and they definitely need to offer a good service or product so that people will want to come back. 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. At the beginning of the 3rd month, they decide to pay the £5 extra a month to store their mat in the studio as they can’t be bothered to lug it back and forth when they are practicing so much. 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) + £50 = 5 x 10 (remaining months for mat storage).

Total Value: £997 (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 gross profit. You will also need to deduct any other costs, such as marketing costs to acquire that customer.

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.

Quote on how much a customer is worth to you. CLV. Customer lifetime value. Marketing.

Calculating CLV for your clients

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.

A simple way to calculate this figure is to look at your average order value. 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. There is lots of research that shows that it is generally much more cost effective to keep a customer than get a new one.

As well as knowing what individual customers are worth to you its good to know what an ‘average’ customer is worth. So work out what is the average amount that a customer spends with you over their lifetime of purchasing goods or services from you. Its 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.

Customer Lifetime Value and Marketing Channels

One thing to note is that the CLV will vary depending on where your customers came 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!)

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.
  • Increasing the frequency with which your customer buys from you.
  • 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 complimentary products to them.

Remember that you can only increase the price if the customer perceives it to worth that value. Customer Satisfaction boosts CLV, so make sure that your customers are happy!

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 so you can start to identify how you may want to retain them or acquire more of your ideal customers, get in touch.