By Jon Clark, managing partner at Moving Traffic Media, a New York digital agency offering PPC and SEO services.
Lifetime value (LTV) is a significant metric that helps estimate the growth of a company.
By comparing LTV to customer acquisition cost, the results can help make crucial decisions. This might include devising your advertising and marketing budget, for example.
Businesses can use LTV to acquire and retain high-profile customers.
This means more income, thus scaling. But, if customer acquisition costs are higher than LTV, scaling is impossible.
For you to predict and improve customer lifetime value successfully, you’ll need to know how to measure customer lifetime value.
What Is Lifetime Value?
Lifetime value (LTV) is also known as customer lifetime value (CLV). It measures the revenue a company can expect to earn over a lifetime from a single customer.
The longer a customer with a high average purchase value supports a company, the greater their lifetime value becomes.
The metric considers a customer’s revenue value and compares that number to their predicted customer LTV.
Customer support staff, like customer success managers, can influence LTV through their interaction with the customers. If customer service staff are friendly and professional, they’re likely to increase customer loyalty. This leads to higher LTV.
How Do You Calculate Lifetime Value?
Customer lifetime value calculation is based on the average value of the sales and the predicted customer lifespan.
Formulas For Calculating Customer Lifetime Value
• Average Purchase Value
To calculate the average purchase value, divide the company’s total revenue over a certain period with the number of purchases within that period.
Average Purchase Value = Total Revenue / Total Number of Purchases
• Average Purchase Frequency Rate (APFR)
Calculate APFR by dividing the total number of purchases over a period by the number of individual customers who made the purchases during the same period.
APFR = Total Number of Purchases Over a Period / Total Number of Individual Customers
• Customer Value
To get customer value, multiply the average purchase value by the APFR.
Customer Value = Average Purchase Value x Average Purchase Frequency Rate
• Average Customer Lifespan
Customer lifespan is the projected time a customer will have a relationship with your business.
To calculate the average customer lifespan, divide the sum of your customers’ lifespans by the number of customers.
Average Customer Lifespan = Sum of Customers’ Lifespans / Number of Customers
Calculate Customer Lifetime Value
With these values, you can now calculate lifetime value.
Customer lifetime value is the product of customer value and average customer lifespan.
Customer Lifetime Value = Customer Value x Average Customer Lifespan
How to Improve Lifetime Value
Here are some simple ways to increase customer lifetime value.
• Improve Brand Loyalty
When you gain brand loyalty, transactions increase, thus boosting your lifetime value.
Build authority on trust, use a loyalty program and ensure consistency in your brand.
• Engage And Re-engage With Your Customers
To reduce churn rate and improve lifetime value, strive to go beyond your customers’ needs and form customer relationships.
Re-engaging existing customers creates brand recognition. They’re more likely to make repeat purchases and become loyal customers.
You can also win new customers and re-engage old ones by attending and hosting trade fairs and events, checking on quiet customers, rewarding engagement and brand loyalty and improving on feedback.
• Increase Your Average Order Value
A higher average order value results in an improved lifetime value.
Businesses can increase their profit margins or sell more products per transaction to increase the value.
Some sellers offer complementary and relevant products at the checkout. Other retailers place less expensive and enticing add-ons, such as keyrings and sweets, at the counters.
• Improve Customer Service
Customer service can determine whether a new customer will come back again to make more purchases.
Surveys say that 90% of customers name customer service as one of their considerations when picking a brand.
Focus on improving customer experience by ensuring your consumers get excellent service through offering a favorable return policy, personalized services for every existing customer, 24/7 support, a live chat feature, a friendly customer care team and the implementation of self-service options, if possible.
• Increase Retention Rates
Most customers who churn don’t give feedback. Your product analytics team can look into the customers’ behaviors preceding the churn.
This way, you can know what’s causing them to stop using your service. Look for broken links, unresponsive pages or requests to create accounts.
If you can increase customer retention rates, you can improve the predictive customer lifetime value. Try to retain the highest-value customers.
• Determine Common Pain Points And Offer Solutions
Customers want to fulfill a need; that’s why they spend on products and services.
However, some consumers may not know they have a pain point, while others might but don’t have a solution.
You can find common pain points through feedback, reviews or social media platforms and offer solutions.
In that case, it’s possible to gain valuable customers, increase loyalty and improve customer lifetime value.
• Improve Your Onboarding Process
Customer onboarding is the first chance to make a positive impression. Improve this process by making it easy — for example, by using how-to videos.
Show the value of your product or service and even personalize your offering to the buyer persona.
Whichever strategy you go for, encourage customer engagement and ensure the process is straightforward and understandable.
Customer Loyalty = Improved Lifetime Value
It’s wise to calculate CLV. The values show you how much revenue you can earn in a certain period.
However, without customer loyalty, your revenue is hard to predict. Customers will stick where they feel valued and where they are offered excellent services.
Therefore, to improve customer lifetime value, ensure an excellent customer relationship.
Whether you’re a SaaS company, retailer or B2B, a higher lifetime value is an important metric that’ll help you scale.
Focus on retaining existing customers, improving the retention rate and, if possible, onboarding higher-value customers.