Calculating the Lifetime Value of a Customer

Anyone who has ever attended a marketing class has likely heard the mantra that it is easier and cheaper to retain a current customer than to attract a new one. And small business owners experience this acquisition-versus-retention scenario firsthand, as their loyal customers often become the lifeblood of the business.

While excellent guides have been about how to attract a new customer and, more importantly, keep that customer, this article will look deeper into the actual value of a customer who sticks with your small business.

“Customer Lifetime Value (CLV) is a crucial metric for businesses as it helps decision-makers see their customers through the prism of a long-term relationship, rather than a single transaction,” explains a business analysis from Forbes. “It’s also tied directly to the company’s bottom line, which makes CLV especially useful for marketers and customer success teams because it allows them to quantify the value of an organization’s customer experience (CX) efforts.”

When you’re able to identify the CLV for your business, you’ll be better able to understand how much you should be spending to retain your customers, forecast revenue, and measure the success of your business endeavors.

Methods for Calculating CLV

There are diverse approaches to getting a clear picture of your CLV, so let’s take a quick look at 4 of the most proven calculation methods.

1. The Look Back: This method is one of the easiest ways to establish CLV, as it only requires you to examine past purchases made by your customers to identify the average revenue per customer. The drawback is that the focus on the past limits your ability to predict the future. If your customers change their behavior, their past habits could become obsolete.
2. The Cohorts Analysis: While the previous method focuses on individual customers, this approach groups them by common traits. It’s a popular way of identifying trends, helping you better understand how groups of customers interact with your business throughout the year. As with the historical method above, this way isn’t particularly good when you’re trying to make accurate projections.
3. The Acquisition Equation: This approach is based on subtracting the costs of acquiring and serving an average customer from the total revenue that customer brings to your business. It helps you pinpoint your business’s strengths and illuminates areas of opportunity.
4. The Google Trick: Much of the data used to inform various CLV methods can be gathered and tracked in Google Analytics. You can get a great idea of CLV by viewing customer engagement and revenue on the platform. The limitation is that Google only tracks for a finite period, so you can’t forecast extensively. Also, if a customer opts out of cookie-tracking on your website, Google will be unable to gather the necessary data.

Building a More Impactful CLV

Leveraging a calculation method will help you better understand how much money your customers bring in and how much you have to send out to keep it that way. But what small business owner is content with the status quo? 

“Unsurprisingly, there’s real value in focusing on keeping customers around—and happy,” says Forbes. “For example, customers of subscription-based businesses provide 50% more value to those companies in years 2 to 5 than in their first year, according to the Boston Consulting Group.”

Just as there are multiple ways to calculate CLV, there are also diverse ways to enhance it. Here are some recommended strategies:

• Start off on the right foot: Most customers who leave a business do so after their first interaction. Develop ways to welcome these new customers so they can get a feel for the long-term benefits your business offers.
• Make your service shine: Whether it’s resolving an issue or simply giving customers a stellar experience from the get-go, your customer service is essential. Not only will your service help retention, but it spurs organic acquisition, as your happy customers spread the word to their friends and family.
• Communicate with purpose: Modern customers want to connect with their favorite companies. This strategy relates to customer service issues but extends to other areas. For example, you could solicit customer feedback on current products and ideas for future products. Whatever you do, just help your followers feel heard and validated.
• Take things social: One of the best ways to increase your engagement with customers is to reach them where they’re already spending their time online. Thus, social media is essential. If you already have a social presence, use customer profiling to make a strategic addition to your social accounts.
• Reward loyalty: If you’re looking for longevity in your customer relationships, don’t be afraid to incentivize it. Give your loyal fans perks such as exclusive deals, product teasers, or gifts.

 Whatever strategies you use, ensure you’re making CLV a priority. By applying this long-term mindset to your marketing, promotions, product development, customer service, and other aspects of your business, you’ll boost the sustainability of the crucial relationships that drive your success.