CLV - How to Calculate and Increase the Key Business Metric
Do you know how much your clients are worth? If not, you need to get familiar with the idea of Customer Lifetime Value (CLV). This indicator represents the total amount of money customers are going to spend on your product/service.
What is CLV (Customer Lifetime Value)
From the business point of view, it is cheaper to retain current clients than to acquire new ones. Unfortunately, the allocation of relatively low expenditures to take care of long-term customers doesn’t have the exciting appeal of spending more money on acquiring new clients. As you can easily guess, the consequences of such behavior make it easy for existing customers to leave through the exit while you’re obsessing over stuffing the entrance with new ones.
Peter Drucker, a management consultant, once said “what gets measured gets managed”. CLV is one of the things that can be quantified and improved if needed. In fact, there are many ways to calculate CLV formula.
How to calculate CLV formula
Here’s a simple mathematical formula that will give you an idea of how to calculate CLV:
CLV = average value of a purchase X number of times the customer will buy each year X average length of the customer relationship (in years)
Let’s discuss it using an example:
Say hi to Susie. Susie is a young dog owner, an old Labrador female named Jackie. Jackie likes the dog food your company produces.
If we determine that Susie makes two purchases of dog food a month, each with an average value of thirty dollars, and stays with your company for five years, we can say that she spends 12 x 2 x 30 = 720 USD annually, which gives the company (CLV) 3 600 USD for 5 years of cooperation.
As you can see, Susie is a valuable and loyal client.
So how can you effectively plan your budget and marketing strategy so that you can both keep existing customers while fighting for new ones? Keep reading to learn how to kill two birds with one stone.
Strategies for monitoring Customer Lifetime Value (CLV)
Returning customers are valuable and are worth much more than you think. According to YotPo, returning customers spend on average three times more than one-time shoppers:
So how can we improve CLV? By focusing on the simple approach and making your customers’ lives (and purchasing decisions) easier. As you probably noticed, there are two important factors influencing CLV: money and time. Let's take a closer look at each one.
Money: Single sale average
There are several factors that affect that can produce greater value from the products purchased by customers. Below you will find the most important of them:
1. Product reviews
Encourage your customers to share their opinions. Some e-stores don’t provide a forum for writing reviews for fear of getting many negative opinions displayed on their website. Meanwhile customers are looking for transparency and trustworthy brands which do not have anything to hide. As Spiegel Research Center research shows, the likelihood of buying products with five reviews (no matter if they’re good or bad) is 270% grater then likelihood of buying a product with no reviews. Social proof written by Susie and enriched by a photo of Jackie eating your product could be a cost-free but convincing piece of advertising.
2. Easy checkout (don’t discourage customers)
Many companies implement fraud prevention measures that interfere with the buying experience, including using complicated payment rules, filters and other hurdles buyers must navigate before making a purchase. Consider offering different payment methods, so that clients can use the one they prefer. Also remember to display payment confirmation.
Another common mistake in e-commerce involves delivery and logistics. Delivery time is not always clearly stated in the order process and there are often no tracking systems making it possible to see where exactly the ordered product is.
Unclear return policies are another issue. Be sure to provide all the relevant details on your site to avoid frustration and misunderstandings later. Returns are a part of any e-commerce operation involving physical goods so make the process easy and fair.
3. Upsell + cross-sell
Offering additional products or services that complement selected items and suggesting items at higher price points are basics of increasing cart value and CLV. Offer bundle products, be sure to have an accurate prediction engine, think about a free shipping option (with a minimum spend value). In this way you increase sales per order by motivating customers to buy more items on in each transaction (for example Susie can buy dog food and a squeaker toy for Jackie).
4. Cost reduction
Cut down costs to serve clients – including costs from products’ packaging for shipping to answering service team. Unfortunately applying this tactic, you may lose your product outstanding quality; but, on the other hand—is the quality of food, the content of protein and vegetables or the colorful design of the packaging the most important thing for Susie and Jackie?
Time: repeat transaction + retention period average
Many shops have a problem with clients who do not return or do so rarely.
Try to increase the number of transactions your customers make during a chosen time period; comparing to increasing sales per order, this strategy is more about quantity than quality Think about all the actions you can take to encourage Susie to come back. Maybe you can give her a discount on dental snacks for use within 14 days of buying dog food?
Here are a few tactics which will allow you not to lose contact with your customer:
1. Lead nurturing
Offer something special to your customers, like a personalized thank you message, unique gift (like birthday discount) etc. Except those action take for other elements connected to this topic like:
Use newsletters – email marketing lets you maintain contact with clients and give you the possibility to inform them about promotions, new products or anything else they might find interesting;
Thinking once again about your buyer persona when creating communications – and about customer segmentation. Try to make your clients feel special. Listening to their needs is a straight way to perfect personalization and making tailor-made company-client conversation.
2. Loyalty programs
An extremely effective tactic for increasing CLV. Loyalty programs let you identify the most valuable customers, those who regularly spend more in your store.
3. Designing a survey for leaving customers
When customer decides to leave your product or service behind, there can be valuable lessons to be learned. Try to find out why this is happening with an exit survey. Send customers a short and easy form and keep it simple. Use drop-down lists and elements and make it fast and easy for them to share any information about why they chose to look elsewhere for what they need.
It seems like an obvious point but taking care of the little things in your relationship with customers means they’ll stay with you longer. More engaged customers spend more and keep coming back again and again, the two habits that boost their CLV and drive your profits.