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How To Calculate Your Customer Lifetime Value (CLV)

How To Calculate Your Customer Lifetime Value (CLV)

The ever-evolving digital revolution paired with the advancement in technology has produced many new and innovative ways for companies to make customers happy. 

However, gaining the trust and loyalty of your customers is extremely difficult, and retaining it is even trickier. There is fierce competition between companies, and many businesses — big and small — feel the burn. One particularly tricky aspect of keeping customers happy is figuring out how to value them properly. 

If you're struggling with that exact thing, you're in luck. This article will cover how to calculate your Customer Lifetime Value (CLV).

Let's jump into it!

What is Customer Lifetime Value (CLV)? 

Retaining existing customers is much more profitable than the efforts required to acquire and retain a new customer. This logic works because once the trust is built, customers are more likely to return to the path of familiarity — you. 

However, the tricky part is identifying your company's most valuable customers. Customer Lifetime Value (CLV) is how you figure out the best picks from your (hopefully large) pool of customers. 

The value of a customer is measured in terms of the profit that the company can generate from them. So, CLV is the amount of money a customer will spend throughout a lifetime of interactions with your company.

How to calculate your CLV?

You can calculate CLV with this basic formula: 

Customer Lifetime Value = Customer Value * Average Customer Lifespan

This formula requires two metrics:

  • Customer value

Customer Value is calculated by multiplying the average purchase value by the average purchase frequency rate (we'll cover this shortly).

  • Average customer lifespan

Average customer lifespan is calculated by averaging the time between the first time a customer bought something and the most recent time they bought something.

Or, you can use a more complicated formula that will give you a more accurate result. This formula is:

Customer Lifetime Value = (Average Purchase Frequency * Average Purchase Value * Average Gross Margin * Average Customer Lifespan in Months) / Number of Clients for the Period

Below are a few metrics that are needed for this CLV formula:

  • Average purchase value

The average purchase value is calculated by dividing your company’s total revenue within a single period (let’s say in one year) by the number of purchases customers make throughout the year. 

  • Average purchase frequency

Average purchase frequency is calculated by dividing the number of purchases in the period by the number of unique customers who made purchases during that period.

  • Average gross margin

Average gross margin is calculated by subtracting the cost of an average sale from the revenue gained from an average sale.

Why is CLV important?

So. Now you know how to calculate your CLV. But why is it so important? Because:

  • Higher CLV equals higher revenue

If you focus on the good, the good gets better! CLV works on the same principle. 

If you find a set of customers who have the potential to come back and make bigger purchases, you might as well focus on that specific group of customers through marketing. Calculating CLV will help your company predict which customers will be profitable, and as a result, you'll bring in more revenue.

  • It helps you identify your target customers’ behavior 

Being good at business is all about being spot-on with predictions and learning the ability to take measured risks. Identifying your target customer’s consumer behavior can assist in preparing a fool-proof marketing strategy to engage them. 

Changes in your customers' CLVs can help you pick up on their behavior. Maybe they only purchase in December. Maybe they make purchases at the end of the month when they get paid. You need to know these things if you want your promotions to work. 

  • It helps you boost customer retention long-term

Once you can understand a customer's behavior, you will know what you should do to keep them coming back. Identifying customers with a high CLV will give you hints on new and innovative ways to boost customer retention. 

  • It helps you spot sudden changes in purchasing behavior

CLV can help you spot sudden shifts in consumer behavior. Spotting these is key in being able to fix potential problems or capitalize on certain trends quickly. 

CLV models

The CLV formula we shared earlier in this article looked at customers as they are right now. But there are more ways to look at CLV:

Predictive CLV

It's easy to identify your top customers, but have you thought about those who might have a high potential of becoming loyal customers but are at an early stage of developing their relationship with your company? Only focussing on the most visible set of loyal customers might distract you from other highly lucrative groups. This is where Predictive CLV comes into play.

This CLV is calculated using data based on the previous interactions that your company has had with its customers. The formula for predictive CLV is: 

Predictive CLV = Customer Value * Expected Lifespan

There are many ways to calculate expected lifespan — you can use a figure based on previous customer behavior, use an average across your customers, or make an estimated guess (your choice). The expected lifespan is key for this formula — it is the thing that predicts the accuracy of your calculation. 

Historical CLV

Historical CLV — also called traditional CLV — is based on the total profit your business has made in the past. This calculation is easy because you only require data from previous purchases. Here's the formula:

Historical CLV = (Translation #1 + Transaction #2 + Transaction #3) / Average Gross Margin 

You can use as many transactions as you like in this formula, but the formula's accuracy will increase when you use more.

This formula has fewer applications than the predictive CLV formula, as it can only determine what your customer's value was, not what it can be.

CLV applications

Once you have understood how to calculate CLV, you must focus on how to apply it to get the most benefit from it. Here are five applications:

  1. Use it to optimize your onboarding process

The onboarding of customers might seem like a strange concept outside aviation, but it sets the stage for your interactions with customers. 

You must quickly grab this opportunity to make a lasting impact on your customers, so they stick around. Use the information that you already have about them to deliver the product that best suits them. For example, many online shopping applications use artificial intelligence to track customers' purchases, understand their choices, and suggest similar items. Some online fashion retailers can even suggest what size the customer might like based on previous purchases (of course, you need to be careful with this). 

Use your CLV to identify good customers to target. Then, get to work. Improving their experience will surely hook them to your company.

  1. Use it to increase your average order value

Have you noticed that you often go for a full meal at McDonald's even when you only want a burger? This is because McDonald's presents you with a deal that tempts you into increasing your order value. It's an ingenious strategy that has been made fool-proof by many big brands.

You can also apply this strategy if you are a SaaS brand or an eCommerce retailer. You can strategically position your prices to make it seem better for your customers to go for an annual subscription compared to a weekly or monthly subscription or a larger order compared to a smaller one. 

Changes in your CLV will tell you if your strategy is working. If it grows, you're on the right track. 

  1. Use it to build long-lasting relationships 

Now, you have given your customers the best experience possible and a reason to return. However, with the competition that is lurking around the corner, you must make sure that you take that extra step to connect with your customers personally. 

Thanks to social media, your company now has another channel to connect with and understand your customers apart from your company website/app. You can use social media to broadcast your message to customers with a high CLV (or a high predictive CLV, of course). 

For example, a company that makes vegan products could identify high CLV customers and engage with them by sharing vegan news, vegan recipes, and new vegan products. This will give these customers a tangible reason to stick with the brand that doesn't include the products alone. 

As mentioned in the previous dot point, increases in your CLV indicate your strategy is working well. 

  1. Use it to seek out feedback

You should expect a wide range of CLVs from your customers — this is a good thing! You can select customers with a range of CLVs and invite them to give you feedback on your brand, marketing, and products. 

Recruiting a diverse pool of customers will give you more diverse feedback. Without knowing each customer's CLV, you wouldn't know who to pick. 

Really focus on feedback from customers with the highest and lowest CLVs. The top customers will likely know your brand very well, and the customers with the lowest CLVs will have likely seen it at its worst (thus, they will have lots of great feedback to give). 

  1. Use it to improve customer service 

Prompt and efficient customer service can go a long way. But there's always room for improvement, even if you already offer good customer service. 

Similar to the last dot point, use your CLV to build a large sample of customers who've had experiences with your customer service. Then, seek feedback from them and use it to improve your practices tenfold. 

When your average CLV grows, it's a sign your brand is offering good customer feedback. So, track your CLV month-on-month long-term. 

CLV, ecommerce reporting, and Triple Whale

Identifying your business's most profitable customers is crucial so you can direct your focus to them. Calculating your CLV is one fantastic way to do this — it helps you assess customers' values objectively.  

We've explored three CLV formulas you can use in this article, the simplest of which is:  

Customer Lifetime Value = Customer Value * Average Customer Lifespan. 

CLV is fantastic for learning more about your customers, as is Triple Whale. With Triple Whale, you can get better insights into your business’s finances, reporting, and Return on Investment (ROI). Triple Whale even offers Triple Whale Pixel, which can help you learn about your customers' behavior. 

So what are you waiting for? Let Triple Whale track your analytics and sharpen your focus.

Get started with Triple Whale today!

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