Customer Lifetime Value: calculate & increase

But how do you calculate Customer Lifetime Value? And more importantly, how can you increase it?

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV) is the total revenue you receive on average from a single customer over the entire period that they remain a customer. In other words, it’s the amount of revenue an individual customer generates for your business.

The CLV is important because it provides key insights that you can use to make better decisions for your business. Think about:

• Maximum acquisition costs: if you know what customers bring in, you also know the maximum amount you can spend on marketing to bring in those customers and still make enough profit.
  
• Focus: CLV helps you use your marketing budget efficiently by focusing more on the customers who buy from you more often, spend more and are thus the most profitable.
  
• Sustainability: by increasing your customer lifetime value, you are less dependent on new customers and increase the future sustainability of your business.

How to calculate your Customer Lifetime Value

Basically, the customer lifetime value consists of three elements:

• Average purchase value
• Average purchase frequency
• Average lifespan

You can calculate the average order value by dividing the total revenue for a given period by the number of sales during that same period.

The average purchase frequency is calculated by dividing the number of sales in a period by the number of unique customers in that period.

And you determine the average lifetime value by determining the number of years (or months) a customer stays with your company. To do this, check the date of your customers' first and last purchase and calculate the average.

Tip: You can also use your churn rate (the percentage of customers you lose each month or year) to calculate the average customer lifetime. The average customer lifetime = 1 : churn rate.

Formula

Do you have all the numbers ready? Then you can calculate the lifetime customer value with a simple formula:

CLV = average purchase value x average purchase frequency x average lifetime value

Case in point

Say you sell office supplies to SMB companies and you have the following figures:

• average purchase value: €100
• average purchase frequency: 6 orders per year
• average lifetime value: 3 years

The customer lifetime value is then €100 x 6 x 3 = €1800.

If you look at it this way, it's pretty simple. And for an average webshop or SME it is. But in practice, of course, it is sometimes a little different....

Customer Lifetime Value models

You have different models for all kinds of businesses to calculate customer lifetime value.

For example, you can also factor in the average upselling and cross-selling at checkout. The formula would then look like this:

CLV = (average purchase value + average upsell + average cross-sell) x purchase frequency x average lifetime value

But you can also use other CLV models depending on your business and your needs.

Service providers and web shops with many variable costs, for example, often use a CLV based on profit/margin:

CLV = (average purchase value - average cost) x purchase frequency x average lifetime value

And companies that provide SaaS or other subscription services use a formula based on their churn rate and ARPU (Average Revenue Per User):

CLV = ARPU x (1 / churn rate)

Increase Customer Lifetime Value: 5 tips

You can increase customer lifetime value by increasing purchase value, purchase frequency and/or lifetime value. These 5 tips will help you do just that:

1. Increase the customer experience (CX)

By increasing the customer experience or customer experience (CX), people or companies stay customers longer and you increase the average lifetime value.

Sounds like an open door (and it is), but it still often goes wrong. Also with online marketing.

Many companies focus their attention, time, and money on the customer journey before the purchase, while it’s actually during the post-purchase phases of the customer journey that you can work on building a long-term customer relationship.

So make sure you have a solid onboarding process, welcome new customers, and provide them with all the content or information they need for your product or service. Videos with tutorials and tips, for example (and be sure to check out these 7 B2B content marketing examples).

Also see if you can collect feedback after a few days. You can then fix any problems early on and you'll know after a while exactly why people generally drop out.

With that knowledge, you can improve your products, services or service again and thus ensure a better CX with longer customer relationships and thus a higher customer lifetime value.

2. Upselling & cross-selling

Upselling and cross-selling are good ways to slightly increase average purchase value and/or increase purchase frequency.

But then again, you don't want to be pushy or sound like a slick salesman with a sales trick. In fact, that often backfires.

So take a moment to think about how you could present upselling and cross-selling as relevant assistance—how other or complementary products offer real added value.

And especially at what time a customer needs them.

Immediately? Then you can, for example, use product recommendations on product pages or in the shopping cart at checkout.

Only after a while? Then use, for example, email flows to reach customers at exactly the right time with exactly the right product or service.

3. Segment and personalize

Customers prefer a personalized experience. Getting the feeling that you are thinking with them.

But not all customers are the same. Therefore, it does not work to approach everyone in the same way.

That’s why it’s a good idea to segment your customers based on, for example, purchasing behavior, preferences, or value.

This way you can communicate in a much more targeted, relevant and personal way and build a better (read: longer) relationship.

4. Use loyalty programs for customer retention

Loyalty programs are created for customer retention and to encourage repeat purchases.

With a loyalty program, you’re essentially saying, “Hey, you’re a valuable customer, so here’s something extra for you.” You reward customers who stay loyal.

And loyalty programs come in all shapes and sizes, so there's always something that fits your business.

For example, let customers save points with every purchase in your shop that they can redeem later for discounts, gifts or special offers.

But you can also give loyal customers exclusive access to a community where you share extra valuable tips. That can be valuable, too.

It's just what suits your business and your customers.

5. Let customers tell their story

Customer stories and case studies also work well for increasing your customer lifetime value:

• strengthen the trust of existing customers (more repeat purchases)
• Create emotional bonding (higher retention)
• They are effective content for upselling/cross-selling (see tip 2)
• they can activate 'sleeping' customers
• They provide insight into customer needs so you can further improve your communication

Let satisfied customers tell you why they bought from you, what it brought them and why they keep coming back.

Put those stories on your website, incorporate them into email campaigns or use them as remarketing content on social media.

Or even better: use them to strengthen your other strategies. For example in your onboarding flow, as an email for a specific segment or as part of that exclusive community!

Also calculate and increase your Customer Lifetime Value?

Do you have any questions? Would you like to know where to find the user lifetime metric in GA4 to calculate customer lifetime value? Or would you like to increase your CLV with smart online marketing? Feel free to contact us. We’d be happy to help.