The customer lifetime value shows you how well you are maintaining the relationships with those who engage with your products and services.
Just the term “customer lifetime value” sounds like a positive thing for business, right? The worth of a customer over the lifetime of a relationship – now that’s valuable.
So if you’re wondering why it’s important and how to calculate it, keep reading. It’s the one term that means the most to your bottom line. It answers the question – what keeps customers coming back for more?
Customer lifetime value (CLV), also referred to as lifetime value (LTV), is the total worth a company earns over the entirety of its relationship with the customer.
We’re going to cover some key things you need to know about it along with how to measure it for the success of your WordPress site.
Let’s dig in.
Why is Customer Lifetime Value Important?
As a business owner, don’t worry about calculating your CLV just yet – just understand the power of the customer experience so you can start to understand the key drivers. Here are some ways it’s important to your bottom line:
- It positively impacts your revenue.
- It reduces customer acquisition costs.
- It targets ideal customers.
- It increases customer loyalty.
Knowing your CLV helps you develop strategies to acquire new customers and retain existing ones while maintaining profit margins.
The lifetime value of a customer is a great metric to use when you have a long relationship with a customer – like a subscription or a contract.
What Are Your Customers Costing You?
To understand what your customers are costing you, it’s important to learn about your customer acquisition cost (CAC) – the money you invest in attracting a new customer. This could include paid advertising, marketing, or discounted offers.
Keep an eye on the cost of that customer to you. For example, if the CLV of an average customer is $100 and it costs more than $100 to acquire them, you could be losing money unless you dial back your acquisition costs.
Breaking this down by customer can help you understand these costs, and dig into details like whether some high-level customers are more expensive than others. If the cost of serving an existing customer becomes too high, you may be making a loss despite their high CLV.
Keep in mind the difference between a one-off sale and a subscription-based customer. Your cost may be higher upfront for a one-off sale, however, a recurring customer with a lower price point increases the lifetime value over time.
The other factor to consider is that a contract gradually drops off the longer the customer stays with you. If renewal rates drop, your average cost is likely to rise and cause a decrease in profitability.
Understanding these numbers over time and being able to track them is the only way to get an understanding of what’s driving customer cost, loyalty, and return on investment.
It’s time to do some math.
How Do You Measure Customer Lifetime Value?
Now that you understand the basics of customer cost, it’s time to start measuring. CLV can be measured by:
- Identifying the touchpoints where the customer creates value.
- Creating the steps in the customer journey.
- Measuring revenue at each touchpoint.
- Adding all of this together over the lifetime of that customer.
The simplest formula for measuring CLV is:
Customer revenue per year x the duration of the relationship in years – total costs of acquiring and serving the customer = CLV
This formula is suitable for situations where the figures are likely to remain relatively flat year over year. But here’s how to really calculate it…
Start by finding the value of the average sale. If you haven’t been tracking this data, consider looking at a 1 to 2 month period as an example for the full year.
Measure customer retention. Figure out how long the average customer stays with your brand. Some brands, like subscription-based SaaS companies, inspire lifelong loyalty. Others, like retail chains, may have fewer loyal customers.
Calculate the average number of transactions in a given period. Do customers purchase daily, weekly or monthly – or perhaps multiple times of each? The frequency of visits is a major driver of CLV.
And now it boils down to calculating customer lifetime value, based on these math equations. Now you have the inputs. It’s time to multiply these numbers together to calculate CLV in one great big number.
Now that you understand how to measure CLV, how do you go about improving it? We’ve got the answer to that too.
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How Do You Improve CLV?
The ultimate question is – how do I improve customer lifetime value organically? Well, it’s all about connection building with your customers – and making those connections count.
The way to boost your CLV is to create, build and nurture quality customer relationships. We broke down the most impactful ways to improve CLV just for you.
Show Love to Loyal Customers
When you get good customers, hold on tight. No matter what your customer volume is, each person deserves some love. Showing appreciation to your customers is key to keeping them around.
You can nurture your relationships with these individuals or groups using targeted marketing and special offers that recognize their loyalty. This could include:
- Sending unsolicited swag (for no reason)
- Offering free shipping (if applicable)
- Invitations to top-tier benefits as a service (add-ons)
- Access to exclusive or pre-release products and services
And, never underestimate the power of a hand-written card.
Amplify Customer Experience
Customer experience is made up of every touchpoint between a customer and a brand, including search, nurtured queries, purchases, and product use. That’s why they call it the “experience”.
Improving the experience is an all-hands-on-deck job that’s often conducted using a customer experience management program. This is a process of observing, responding and making changes based on the customer’s needs that add up to loyally over the long term.
This amplification can come in many forms. It can be an email outreach campaign, social media polls, and surveys, phone call check-ins or product reviews. Keep asking questions and adjusting the customer happiness formula until you get the right mix.
Side note: the customer experience program doesn’t ever end – it’s always evolving as the customer’s needs are always changing. So get strapped in for the long haul.
Showcase Your Value
Customers don’t just want to find and use your product, they want to be educated on it (and the industry). Often, a customer will come to you looking for how you can solve their problem – they may have joined a webinar, read a blog or downloaded an ebook. These are all actions that scream, “I want more”!
Create a knowledge database that will keep your customers engaged and coming back for more.
For example, If they downloaded a donation plugin for their WordPress site, they may not know the best way to use it or even how to start a fundraiser. That’s why you have a database like the GiveWP News and Blog, where customers (and fans) can come back for more information to better their usability.
Offer a loyalty program that incentivizes repeat business by offering benefits or discounts. Everyone wants to be a part of something – and community is everything these days. A quality loyalty program can build trust in the community and offer your customers a benefit they didn’t even know they needed.
Close the Churn Loop
As a business owner, it’s important to be mindful of customer feedback.
Your biggest job is to make sure your customers are happy and to be there when they aren’t. Don’t be afraid to ask for real-time feedback, surveys on how they were treated and responses to unhappy times.
Closed-loop feedback is a powerful way to turn dissatisfied customers into raving fans. Here are a few types of customer feedback and how to collect them:
- Customer satisfaction feedback – include comment boxes, incentives, social media polls, chats or forms.
- Product/brand feedback – conduct customer interviews, join groups, host usability tests, offer customer reviews or follow-up surveys.
- Sales feedback – listen to website analytics, enlist post-purchase notifications, or share NPS surveys.
Try proactively reaching out to detractors and intervene before the breakdown of the customer relationship.
In most cases, this type of active listening actually makes the customer relationship stronger because they feel heard. Everyone just wants to be heard.
Top Things To Know For Your Bottom Line
Having a customer for life may seem like a full-time job, but it’s really about putting yourself in their shoes and understanding the process. Once you make a connection, the important thing to do is keep it alive.
Let’s recap the top things you need to know about customer lifetime value. We covered…
- The definition of customer lifetime value
- What your customers are costing you
- How to calculate CLV
- Ways to improve customer retention
As you set out to make a customer for life, remember that everyone is human and that kindness wins, every time. Your brand, customer service, and product are all in it together to make your customers fall in love with you – keep that love alive by showing them they are the best!
And if you want more resources on how to open up a membership site, reach out to us and try before you buy! It’s the best way to keep customers around.