What Is What is Customer Lifetime Valuation (CLV) and why does It Matter?
What's the customer lifetime value? Find out everything you should know about how to calculate the value and why it is important to your company.
When you're managing a company that includes an online store or online course, your goal is to sell as much of the services you provide to all in your targeted audience.
Finding new customers is a difficult task. It is necessary to travel and promote your company, and you need get cold calling and you must create and pay for advertisements. There's no doubt that one of the most crucial metrics among startups is the CAC or customer acquisition cost.
To create a sustainable business it is essential to reduce your CAC to a minimum or, at a minimum, lower than how much an average customer is going to pay for your services during their entire life. The latter concept is called the customer's lifetime value (CLV).
Knowing the lifetime value of customers is crucial to building a profitable enterprise. In this article we'll teach you how you can calculate the life-time value, deconstruct the customer lifetime value formula and introduce a few ways to improve the average customer longevity in your company.
What is the customer's lifetime worth (CLV)?
The value of a customer's lifetime (CLV) refers to the total amount of revenue you can expect, on average, to receive from a single client as long as they continue to purchase from you.
Example A typical customer subscribes to your service monthly for two years, you may determine CLV by multiplying their annual subscription cost by 24 months.
Why does customer lifetime value even matter?
The value you assign to your customers' lives is essential to run a sustainable business because your customers do not come free- you have customer acquisition costs that are associated with each purchase.
In the same way, every business has a churn rate, or a metric of how much the customer base shrinks every year without adding new customers. If your customer base grows at a rate of 10% per year however your churn percentage is also equal to 10% then you're not increasing your revenue at all.
A business that has a low rate of churn or an very high rate of retention can be considered "sticky" and excellent at keeping existing customers satisfied. In all other respects, a business like that would have high customer loyalty and a significant value to the customer's lifetime due to this.
Understanding how much the customers you serve are costing you
Establishing new relationships with your customers could cost you five times as much than keeping loyal customers who already enjoy your service or product.
Retention of customers by just five percent could result in an increase of 25% in profit.
Imagine that on average customers spend $100 overall with your business. If your average acquisition cost is $120, you're actually losing money to each customer, and eventually run out of money if you do not manage the expenses or improve the customer lifetime value.
How to calculate customer lifetime value
Calculating customer lifetime value might seem difficult at first. For instance, how do you figure out the length of time a client will remain with you?
Additionally, if you have more than one targeted audience then you'll have more than one customer life-time worth. For example, some customers may purchase your product once, while other customers visit each month.
If you're in the middle of a business structure and would like to learn more about the process of calculating lifetime value for customers thoroughly, the best reference guide should be the Calculate Customer Lifetime Value: An Easy and Simple Reference written by Gerardus Blokdyk. It is an extensive self-assessment tool to evaluate the value of a customer's lifetime for various business models.
Most small firms, however, will estimate CLV quite easily, so long as they track:
- Total revenue across customer segments
- Number of customers
- The total number of orders
- Rate of Churn
It's essential to make sure all your information is seamlessly integratedIdeally, in one system or at a minimum, as small as possible.
The customer lifetime value formula
To accurately calculate CLV the correct way, you must go through a few preliminary calculations first.
Start with the average order value by dividing your total revenue by the number of orders in a given time period. Then, calculate how frequently an average consumer spends money with you by multiplying the value of all orders by the amount of customers.
By multiplying the value of your average order by the average order frequency will give you value for your customer.
For calculating the lifetime value, however first, we must know the average customer lifespan first. This is where your churn percentage can be useful. If your churn rate is 5percent annually (or 5/100, which is 1/20) which means that the lifespan for your customer will be 20 years. With a churn percentage of 25%, the typical customer lifespan is four years.
Finally, the formula for customer lifetime value is customer value multiplied by the average length of time a customer has been in service. So, let's say that the average value of your customer is $100 and has a lifespan of 5 years. Then your customer lifetime value would be $500.
5 ways to improve the value of your customers' lives
Improving your customer lifetime value is essential and should be among the top priorities in your business.
Higher customer lifetime value results in higher total revenues in addition to higher customer retention since it allows you to invest more on customer support as well as lower customer acquisition costs and better strategies for acquiring new customers as you can increase your spending to draw highly profitable customer segments.
Below are five suggestions you can implement today to increase your customer lifetime value.
Make sure you invest in your customers help
The process of attracting new customers is vital as is keeping them happy throughout their experience with you and your business. Excellent customer service results in greater customer satisfaction, lower churn and higher frequency of purchase.
Make sure to collect the complaints of customers and then eliminate the source of their complaints of your service or product.
Rewards your most loyal customers
Take a hint from banks, airlines and large retail chains -- all of them have loyalty programs, which offer clients something of value to help them increase their spending. that is spent.
Explore creative ways of sharing part of your profit margin to your most loyal clients. Maybe they get discounts or free shipping, or special merchandise, or invites for events.
You can even design tailored customer-success programs that specifically help the top clients achieve their goals.
Start a referral system
Referral programs can make it simple for existing customers to bring new customers in to take a look at your service. Since this acquisition channel generally has low customer acquisition costs, you can give something of value back to both customers, such as a temporary discount or free shipping.
People who refer friends and family members engage with your brand more frequently as a result and are encouraged to spend more money through discounts. In addition, people they refer are more receptive to your brand, and are likely to buy more often than using other channels of acquisition.
Increase your average purchase price
Every time a customer is about to buy from you is an opportunity to earn more. Make sure you think about your cross-selling and upselling strategies to maximize the amount of revenue you earn.
It works by offering a replacement product with greater value, and describing how it is the better match. Cross-selling is the process of presenting items that complement the one the customer has selected. These two strategies affect the average order amount and the CLV as a result.
Make your product more attractive or improve your service
Although there are various strategies to ensure your clients are satisfied, in the end, they are buying something from you to meet their requirements, and if you improve it, they will buy more frequently and spend longer.
Pay attention to the needs of your customers and develop a strategy with the goal to increase the value of your product to the people who will benefit from it. While coming up with an innovative feature is unlikely to result in lots of new customers overnight, it's the best method for improving your customer lifetime value for the long-term.
How can you improve CLV in your online course
Research on the subject of the value of a customer's lifetime has been published since the past few decades. How do you get from research to application?
If you're running an online course among the main considerations in making sure your CLV stays high is the integration. Controlling the user experience, as well as the instructional materials, video designs, support for customers and communication is very important. It's the reason why an integrated platform, such as a mishmash of random methods.
You can design an entirely new course within an hour. No coding skills are required simply pick one of the professionally created templates and enhance them further using a drag-and-drop editor. You can add any multimedia material that you would like to include, regardless of whether they're presentations, quizzes and even texts.
Begin today at no cost! It is an effective solution to keep your client's lifetime value as high as is.