Whether you’re working in eCommerce or have a brick and mortar store, understanding customer lifetime value is important to make future projections and a comprehensive marketing strategy. Comparing lifetime value to new acquisition costs can help you to decide on the best opportunities for your business, and can help increase growth.
In this post, we will explain what client lifetime value is, how to measure and extend it, and the opportunities in extending lifetime value over onboarding a new client.
What is client lifetime value / customer value?
Client lifetime value is an estimate of the revenue generated from the average customer over their entire relationship with a company. This allows a business to determine what value a well-treated customer can add to the business. It can also indicate customer satisfaction or dissatisfaction, as happy customers often return, and unhappy ones will not give you business again.
Why should you be measuring LTV?
It is important to measure customer value in order to determine whether your business is satisfying its customers. LTV can also direct your attention to gaps in your marketing strategy, or can inform new strategies. For example, if you find that your customer value is low, you can create a promotional plan to reward returning customers, or can use email marketing to encourage returns.
Measuring LTV can also improve your forecasting, and will help you make decisions regarding customer acquisition costs.
How do you measure lifetime value?
Lifetime value is a simple financial metric for businesses to determine their success and how they can improve. Follow these four steps to determine your customer lifetime value:
- Calculate your average order value: You will have likely already calculated this, as it is an important eCommerce metric. If you have not, use data from the last three months, and divide the total by the number of separate sales your business has made.
- Determine the average number of repeated transactions per period: Depending on your type of business, the frequency of visits in an important metric. For a local coffee shop, this might be three times a week, while a shop that sells running shoes will see repeated visits once or twice a year.
- Measure customer retention: The last thing you want to determine is the loyalty of your customers - how long do they use your brand for? Are they a customer once, for a year, or for ten? This is possibly the most important metric when determining LTV, as it indicates customer satisfaction.
- Calculator your customer lifetime value: You now have all three metrics needed to determine your LTV. Use the following formula to calculate your customer lifetime value. CLV = Average Transaction Size x Number of Transactions x Retention Period.
An example of CLV would look like this: CLV = £3 (average sale) x 50 (annual visits) x 5 (years) = £750
How do you extend lifetime value?
There are a number of ways to extend your business’s lifetime value. Here are some of the simplest ways to increase yours:
- Improve customer service and experience
- Create customer loyalty and reward programs
- Use social media and marketing to improve brand awareness
- Improve customer onboarding and engagement
- Use technology and software to make sure your site is fast and easy to use
Extending lifetime value vs onboarding a new client
Investing resources in extending lifetime value can have better ROI than onboarding a new client. The resources required to onboard a new client are often extensive, as the potential customer needs to find out about your brand, and trust it before making a purchase. While a good marketing strategy can achieve this, it is often easier, and cheaper, to work with your current clients.
As existing clients already know at least one or two of your products, your brand, and what they can expect from the purchasing process (like your shipping costs and packaging) it is simpler to encourage returns. In addition to this, extending your customer lifetime value means that onboarding a new client will have greater value in the future.