What is Customer Lifetime Value in Marketing

Understanding lifetime value and how to improve it
Lifetime Value is Something You Should Always Take Care of.

You probably want to know how healthy your business is and how likely it is that your business will grow in the near future. For these reasons and more, you need to understand your Customer Lifetime Value.

This article will show you what Customer Lifetime Value really is, how important it is to your business, and five tips you can use to figure out your CLV (Customer Life time Value).

Knowing your CLV will impact your marketing strategies and maybe even reshape the type of content you offer. It’s a fact that Customer Lifetime Value is one of the most important KPIs you need to pay attention to.

We’re going to look at CLV from a marketing perspective and show you how to better connect your business with your customers. This means that you will have a strong understanding of the importance of this value after reading this article.

If you need help figuring out your Customer Lifetime Value or creating the right marketing campaign for your business, contact us on +357 99762835 or via the contact form below.

What is customer lifetime value?

Customer lifetime value
Customer lifetime value

Customer Lifetime Value (CLV) is the value of your customers over the time they spend with your business. Your customers are the ones who will pay for your products and services, and the more they like your products and services, the longer they will stay with you. Example

You have a customer who buys a product from your offering for 10 years. This customer spends 1000 euros per year; in this scenario, your Customer Lifetime Value is 10,000 euros, minus the money invested to attract this customer.

As you can see, this is a fairly simple example, but it works perfectly to show you the importance of your CLV (Customer Lifetime Value).

What role does customer lifetime value play in marketing?

You can’t run an effective marketing campaign if you don’t know your Customer Lifetime Value. Whether you are at the beginning of your business, or your business is already thriving, you need to know your Customer Lifetime Value. Every online marketing service provider needs to start with this first step when working for a new client.

The role of Customer Lifetime Value in marketing campaigns is crucial, as this value will determine the success or failure of your business. When you know your Customer Lifetime Value, you can develop compelling marketing strategies that produce positive results. You need to focus not only on the money your business is making from your customers today but also on the future value they could represent, which brings with it the importance of customer retention.

In a few words, the role of knowing customer lifetime value in marketing is to predict the results of your marketing campaigns.

What is the CLV formula?

It is a method of determining a customer’s value to a company, starting from their first order or sale of a product. As mentioned above, it’s not just about what they bought, but rather what they might buy in the future.

Here you have the right step-by-step guide to calculate your Customer Lifetime Value with the right formula:

Step 1: Calculate Average Order Size (AOS)

You can determine the average order size by running a report of customer orders for your products. You need to divide your business sales by the total number of customer orders.

Average order size (aos)
Average order size (AOS) formula

Step 2: Finding the Average Order Frequency (AOF)

The Average Order Frequency is found by selecting a period of time and compile all orders made for the customers inside that period to then divide them by the total amount of customers belonging to the selected period.

Average order frequency (aof)
Average order frequency formula

Step 3: The Average Customer Value Formula (ACV)

The ACV or Average Customer Value represents the average revenue each client brings to your business, considering a determined period of time. You determine this Customer average value simply by multiplying AOS with AOF. (average order size x average order frequency)

How to calculate average customer value 1 -
Average customer value formula

Step 4: Learn to calculate your Average Customer Lifetime (ACL)

Here we refer to the days between the first order minus the last date those customers made their last order. When you need a yearly overview, divide the resulting number by 365. Check the following example:

If your ACL is 2.200.5 days divided by 365 will give you 6.0 years.

The calculating formula for the average customer lifetime (acl)
Average Customer lifetime (ACL)

Step 5: The right way to calculate Customer Lifetime Value (CLV)

You calculate the customer lifetime value as simple as dividing the Average customer lifetime by average customer value. (ACL / ACV). As you can see, there is nothing hard or complicated here. But knowing this is important for your next online marketing campaign.

Calculating the customer lifetime value (clv) the right way
Customer Lifetime Value (CLV) formula

Now, below you see easy to understand examples using generic data to calculate customer lifetime value. In our example, we determined that our customer lifetime value (CLV) is €245

Formula used to calculate customer lifetime value with examples
CLV Example

How do you use Customer Lifetime Value?

You know you’re on the right track. If you can sell a customer something they love, they will buy it and be excited about it. With CLV, you can redefine and leverage that customer lifetime value by incorporating it into your customer acquisition across marketing channels.

Can CLV be negative?

Yes, it can. This means you should pay attention to what new offering you present to your customers and how you approach them. Customers may not perform as expected, and the result can be a negative CLV.

On the other hand, there is another reason why a CLV can be negative: You spend too much on services and retention strategies to keep customers. If this is the case, you need to rethink your marketing strategy.

How can you increase customer lifetime value?

All of the above formulas, definitions, and examples are the foundation of your strategy and should be used in conjunction with others. Then, regardless of your company’s CLV, you need to optimize it by considering the following factors.

Identify your buyer persona, offer them targeted services and products. Consider when to present them with the offers and by what method. (Social channels, email marketing, push notifications, etc.)

Increase the average order frequency

  • Use retargeting marketing strategies
  • Run a loyalty program that focuses on rewarding your customers for their new orders
  • Provide fast and professional customer service, including return strategies
  • Your marketing camping needs to be based on real data. Personalize and highlight your best offers, taking into account activity, audience interest and/or purchases

Increase your Average Customer lifetime

  • Create a connection with your customers through your social media channels and email list
  • Focus on taking a customer-centric approach. Try to solve your customers’ needs, their interests, more than just selling your products
  • Create webinars, online events, meet with the community
  • Develop customer-centric strategies to take care of the relationship between your business and your customers

Tips to increase average order size

  • Identify the spending level of your customers and try to create a loyalty program based on it
  • Bundle offers help a lot in increasing the AOS
  • If possible, offer a discount on the order size
  • You can make a free shipping offer based on the size of the order
  • Cross-sell and upsell are also good tips

Conversion rate optimization

  • Let your customers see what other customers are saying about your services or products
  • Boost the checkout process by reducing the time to purchase. (Remove unnecessary steps via smart forms)
  • Configure your platform to send reminder emails when a potential or existing customer has products in their cart
  • Always include an exit-intent offer after the customer completes an order

Final words

With every marketing campaign, you decide to run, you need to take your business to the next level. Also, every time you decide to run a marketing campaign, you need to effectively include your customer lifetime value.

Here’s where you learned:

  • What is the role of customer lifetime value in marketing?
  • What is customer lifetime value?
  • What is the CLV formula?
  • How do you use customer lifetime value?
  • Can the CLV be negative?
  • How can you increase the Customer Lifetime Value?

Remember, we are ready to work with you on your next marketing campaign. You can call at +357 99762835 or send us an email via the contact form below.

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