Can you name the most precious thing your business has?
It’s data that’ll give you visibility and insights to make better decisions, answer customers’ needs and know exactly how your competitors are tracking.
Because even if you’re attracting more and more and more customers, the customer acquisition metric alone doesn’t give you the full picture of whether you’re on a winning streak.
So what do you measure?
Customer Lifetime Value (CLV).
If you know who you’re most valuable customers are, that’s when you can focus your customer acquisition and retention strategies to find them, convert them, and keep them loyal.
If you don’t know the real value of your customers, you could wind up spending a ton of money acquiring customers who don’t provide an ROI.
In this article, you’ll learn what customer lifetime value is, plus a whole host of tactics that you can add to your strategy to grow customer lifetime value and turbocharge your ROI.
What is Customer Lifetime Value?
Customer lifetime value (CLTV or LTV) is a metric that tells you what a customer is worth to your business.
Think of it as a prediction model that helps you understand the total revenue you can expect from a single customer over the period that they continue to buy from you.
LTV takes into account two elements:
Customer’s revenue value
Customer’s predicted lifetime with the business
The longer a customer chooses to buy from you, the greater their lifetime value.
For instance, if a customer continues to subscribe to your services for 5 years and spends $100 every year, their CLTV is $500, minus what you spent to acquire that customer in the first place.
The reason we harp on about LTV to our clients is because it tells you which customer segments are most valuable to your business.
That way, you can focus your sales and marketing efforts (and budget) in the most profitable places.
Like any metric, CLTV is best understood in relation to other important metrics.
When you measure it alongside customer acquisition cost (CAC), you can see how long it takes to get an ROI on your marketing and sales efforts.
The customer lifetime value formula
The customer lifetime value model uses this formula:
CLTV = Average Purchase Value x Average Purchase Frequency Rate x Average Customer Lifespan
Let’s break it down.
1. Calculate average purchase value.
This is the amount of money a customer spends on each transaction. Divide total customer revenue in a time period (we recommend one year) by the number of purchases over the same period.
Average Purchase Value = Total Revenue Earned / Number of Transactions
2. Calculate average purchase frequency rate
This is how often customers return to buy from you. Divide the number of purchases by the number of unique customers who made purchases over the same period.
Average Purchase Frequency Rate = Number of Orders Placed / Number of Unique Customers
3. Calculate customer value.
Multiply these numbers to get the customer value.
Customer Value = Average Purchase Value x Average Purchase Frequency Rate
4. Calculate average customer lifespan
Calculate average lifespan by looking at the number of years over which a customer purchases from you and finding the average.
5. Calculate lifetime value
Multiply the customer value by the average customer lifespan to get customer lifetime value.
CLTV = Customer Value x Average Customer Lifespan
Customer Lifetime Value Examples
Example 1. Starbucks
According to Kissmetrics data on Starbucks, the average customer expenditure per visit is $5.90 and the average number of visits per week is 4.2.
So, the average customer value per week is $24.30.
The average customer lifespan is an impressive 20 years.
So, using a simple formula to calculate CLV:
Starbucks CLTV = (52 x $24.90) x 20 years = $25,272
Example 2: Netflix
How does the world's leading internet entertainment service use CLV to increase customer profit?
Netflix has around 130 million memberships.
An average subscriber stays on board for 25 months. And according to Netflix, their customer lifetime value is $291.25.
This figure helps Netflix work out how much they should spend per customer both on marketing and overheads.
A word about predictive CLTV
You can use historic customer data to work our your CLTV, or you can calculate predictive customer lifetime value.
Predictive CLTV will help you understand what a customer is worth to you right now and show you how it will change over time.
For instance, this chart shows CLTV benchmark data from around 200 ecommerce companies over 365 days:
Because customers with the highest LTVs can already be seen, it’s easy for you to make decisions about marketing campaigns.
Actionable strategies to boost your CLTV
Now you know how to calculate customer lifetime value, how do you increase it and drive ROI?
You need to focus on two key areas:
Use your CLV metric to make decisions that help you acquire more high-value customers.
Customer retention is about making sure your customer stays with your business and doesn’t go to a competitor.
This is for services, such as insurance, banking, mobile plans, and anything subscription based. Retention focuses on reducing metrics such as churn rate.
Customer loyalty is more applicable for products. It means making sure that when the customer needs more of your product, they come back and buy from you – not your competitors.
Research shows a whopping 77% of consumers have held relationships with specific brands for 10 or more years.
Around 50% of loyal customers have left a company for a competitor who was able to stay more relevant and better satisfy their needs.
So you need to focus on keeping your most valuable customers and boosting your customer retention rates.
Increasing your CLV can be as simple as sending a brilliant thank you email, or as tough as overhauling your whole customer service arm.
Increase profit margins with these CLTV-boosting strategies
Try these proven actionable strategies to increase Customer Lifetime Value and generate revenue.
1. Segment Your Content
Now you know who your most valuable customers are (and the profit contribution they make to your business). Use that data to inform your content marketing.
Start by segmenting your customers based on their profitability:
Then, you can focus on segmenting your content to match.
Say you offer a food subscription box, like Hello Fresh.
You want to inspire your audience with mouth-watering content.
So, you might start by segmenting your list by category, such as families, singles, students, couple no kids, and so on.
Then, you could take each demographic group and further segment it by CLV. This will show you who the most profitable subscribers are in each group.
Once you’ve got this data, you can create and distribute content that will increase the engagement of profitable subscribers in each segment.
Let’s say Hello Fresh’s most profitable subscribers are in the family segment. The smart way to increase their engagement is to create more content around family recipes:
2. Focus on your Welcome email
Your welcome email (or series of emails) is a powerful tool to convert email subscribers into new customers.
It comes down to one simple reason:
Your welcome email is a new subscriber’s first impression of what it’s like to be a customer.
It’s your chance to build the foundations of a strong relationship, which will ultimately lead to a higher CLV.
What does a great welcome email look like?
Take a look at this one from Procurious:
What we love is how the email provides essential links to useful resources.
Here’s another one from Swisse:
What we love about this email is how it provides an immediate compelling reason to buy from Swisse: a 20% discount.
3. Make it easy to buy from you
Fact: People won’t buy from you if you make it difficult.
The proof is in the numbers:
52% of users said that a bad mobile experience made them less likely to engage with a company. (Impact)
88% of online consumers are less likely to return to a site after a bad experience (Sweor)
One second delay in page load time results in a 7% conversion rate drop (BigCommerce)
More than half of consumers will ditch their purchase if they can’t answer their question or solve a problem quick enough (Forrester)
Nail your user experience.
Make their buying experience completely seamless. Remove all barriers from their shopping journey.
Build trust and convert more customers at the moments that matter.
Here are some simple things to try:
Offer more payment options
Reduce form fields
Be transparent with prices and shipping costs
Add reviews and testimonials
Add trust signals, especially on payment pages
4. Provide standout customer service
Top quality customer service is an essential investment for any business. It can prevent customer churn and increase loyalty.
Even if your product is amazing, poor customer service will send customers running to the competition.
In fact, research shows that:
One in three people are likely to switch brands after just one instance of poor customer service.
Don’t risk it.
How do you offer top-quality customer service?
Try these tips:
A. Provide multi-channel support
Look at which channels your customers use the most and offer you support on those channels, whether that’s live chat, email, Twitter, or something else.
B. Be available 24/7
If you can provide round-the-clock customer support, it’s worth it. At the very least, make sure you respond as fast as possible, because that’s what people expect.
C. Monitor social media
You’ll be amazed how many people go to social first when they have a question or problem. Here’s the challenge: 84% of consumers expect a response within 24 hours after posting a complaint on social channels. Stay tuned in to social media and be responsive.
D. Build an awesome knowledge base
Create valuable resources and content so that customers can find the answers they need. This is stuff like detailed long-form articles, tutorials, video guides, how-to sheets, and ebooks.
5. Say thank you
Two little words that go a long way in business: thank you.
It shows the customer that their business means something to you – that they are special.
And who doesn’t love to feel special?
It’s also a great way to keep in touch with your customers and build the relationship from the get-go.
There are a few ways you can say thank you.
First, the good old-fashioned hand-written note.
That’s what The Cloud Alchemist includes with every order it sends out. They simply write a thank you message on their packing slips.
If you aren’t shipping products, send a thank-you email.
Like this one from Amazon Prime:
What we love about this email, and what makes it so effective, is that it doesn’t ask for anything.
It just lets the customer know you appreciate that they chose you, over all the other businesses.
You might include some helpful content or a special coupon code as a bonus.
Thank-you emails can also be the starting point for a drip campaign.
You might follow it up with a quick survey asking how you did or send some content to help the user get more from their product/service.
This constant contact that adds value to the customer experience can increase CLTV exponentially.
6. Make onboarding count
Onboarding should be on your list of top priorities.
It’s a critical part of the post-purchase stage – especially for service businesses.
The reason is three-fold:
Great onboarding provides advice and tips to help the customer get the most from their purchase. The better their experience from day one, the more likely they are to remain loyal.
Poor onboarding is the leading cause of churn, 23% to be more exact.
Onboarding is where your customer really begins engages with your product/service in a big way, so it’s where you can make the greatest positive impact on their experience.
Every onboarding process will be different, depending on the industry, customer needs and desired outcomes.
Take a look at this on-boarding email from Adobe:
See how Adobe has included lots of tips and resources to help the user get started?
That’s one of the secrets to an exceptional customer onboarding program.
You need to make the onboarding as quick and easy as possible. Provide walkthrough guides, how-to videos, tutorials and other content that will help customers get started.
You could also provide personalised onboarding based on your customer segments and what you know they want to achieve.
7. Reward referrals and repeat purchases
We don’t tell people to offer discounts unless we have a good reason.
And customer retention is a very good reason.
We’ll let you into a little-known trick:
Send a discount code for a customer’s second purchase.
This nudges a first-time customer over the line to become a repeat customer.
Another place to offer discounts is on upgrades. Like this one by WordPress:
8. Win customers back
These are people who have bought from you in the past, but have been inactive for a while.
The trick here is to give them a reason to come back, like this one from WildEarth:
You can also give them a reason to opt out of future emails.
If people aren’t interested in hearing from you, why waste your efforts trying to convert them?
Another great example is this one by private health insurer, Medibank:
Not only does it provide a compelling offer to return, it also tells the user all the things that have changed for the better since they left.
9. Start a customer loyalty program (and make it incredible)
Customer loyalty programs work.
Over half of loyal customers would join a loyalty program if one is offered to them.
How will a loyalty program help grow your CLV?
By motivating customers to purchase more often.
The trick is to give them rewards they really want – whether that’s trading points for goods, discounts or exclusive experiences.
Here’s something else you might not know about loyalty programs – they can work as a powerful referral tool.
Customers who have been referred by loyalty members have a 37% higher retention rate.
Want to hear an insider tip for loyalty programs?
Don’t just reward customers when they buy something.
Reward customers for different actions they take with your brand.
That could be watching a video, writing a review, subscribing to content, sharing content, and more.
These are signals of active engagement.
One brand that gets it right is Starbucks:
Their loyalty program doesn’t just reward customers with something customers definitely want (free coffee), it also makes the whole customer experience easier.
Starbucks Rewards lets customers order ahead and pay with the phone.
No wonder Starbucks has such a high customer lifetime value!
Over to you
Customer lifetime value is more important than many marketers realise.
A high CLV means each customer brings in more revenue for your business.
As each customer becomes more valuable, your business can afford to spend more to acquire new customers and retain your existing customers.
That means more revenue in the long run.
We’ve figured out a sustainable proven process to acquire valuable customers, grow customer loyalty and ultimately improve your customer lifetime value with digital. It’s all right here in this guide.
Download your Digital Marketing Game Plan now!