Understanding your customers is a key part of any business. Why do they shop with you? How much are they spending? Which customers are worth more than others? It would be great to have insight on not only how long a customer will shop your business, but on how much revenue they’ll help generate.
Knowing your customer lifetime value (CLV) allows you to measure those metrics.
What is CLV and why is it important?
CLV is a business metric that measures the value of a customer and their relationship with a company. CLV gives you valuable insights into the predicted net profit from each customer you have and allows you to decide how much you’re willing to spend in order to keep that customer relationship.
The easiest way to calculate CLV is by using the following equation:
(Average value of a sale) x (Number of repeat transactions) x (Average retention time in months or years for the average customer)
Let’s say you’re running a SaaS business. The average amount of time a customer subscribes to your model is 3 years and it costs them $99 per month. The lifetime value of a customer would be $3,564 ($99 average sale x 12 repeat transactions x three years average customer). Therefore a business owner has to spend less than $1,188 per year retaining that customer in order for them to be profitable.
What are the four main benefits of knowing CLV?
When you know how to take advantage of CLV, business managers and marketers can use that information to make decisions that will help grow their business and generate more revenue.
Knowing specifically which customer groups to focus your marketing efforts on can be tricky. Are you better off investing in your prospects, your current general client base, or those who are dormant in your business? Answer: none of the above. You should be focusing on your high CLV group.
It’s well known in the business world that a minority of customers often account for the majority of revenue. For example, Procter and Gamble researched their CLV and found that 56% of its total revenue came from 14% of shoppers. What made this small group unique was that they all regularly shop with the company. This was in comparison with the 86% of occasional shoppers group who only contributed 44% of revenue.
Insight like this can help a business develop their marketing toward their high CLV group and ensure that these shoppers remain loyal.
Churn relates to the amount of customers who have left your business within a given timeframe and is a key component of business growth.
You can reduce your churn rate by knowing your CLV and who specifically to target your acquisition efforts toward. CLV can also help you predict and analyze your rate, allowing you to create strategies to reduce potential churn.
The CLV metrics can also help inform decision making when it comes to customer churn. Think about whether the customer is worth retaining. Be aware that a customer win-back often amounts to a higher CLV on a customer’s second cycle with the business.
Improving Customer Service
Keeping customers happy is of the utmost importance for any business. Without happy and satisfied customers, repeat business will be non-existent.
It’s most profitable to target high levels of service to customers who have the highest CLV. Keep them happy and they’ll likely spend more with your business.
Invite them to special events, install a loyalty system i.e. discounts, personal shopping, or other types of special service. You could even offer high CLV customers deals that aren’t applicable to others.
Furthermore, knowing the CLV score of each customer will allow your customer service team to handle complaints better. For example, a customer with a low CLV calls in to complain about a recent experience with your business. Is it worth the time and energy to investigate the problem to the nth degree? Probably not. Make sure the customer leaves happy but don’t waste resources chasing an already sinking ship.
Having an awareness of CLV makes a business less susceptible to attacks from competitors. People might try and copy your products but if customer loyalty is present, other businesses will be put off trying to steal customers away from you.
Not every customer is equal
Some customers are worth more to a business than others. Measuring and understanding CLV will ensure that your company is able to recognize the customers who are valuable. This will start a shift in focus toward finding and retaining more of this type of customers and leaving those who are less profitable behind.
If you don’t have a clear understanding of your customers, how are you going to gear your business toward them and increase revenue? The success of a business hinges on CLV metrics and can give you a head start in your marketing, churn, customer service, and competitor analysis efforts.
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