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Every business tries to acquire new customers while retaining the existing ones. But they can only do this if their product or service addresses the pain points of their customer base. Satisfied customers equals the growth of your business and the profit margin, so companies seek ways to increase positive customer experience.
They can understand how well they're doing in this regard by calculating their Customer Lifetime Value (CLV). But what exactly is CLV, and why must we measure and find ways to increase its value? This article will provide these answers.
What is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) measures how valuable a customer is to you and your organization on a purchase-by-purchase basis and across entire customer relationships. A marketing metric indicates the total amount spent on your products and services by a single customer or the total revenue a business can reasonably expect from a single customer account throughout the business relationship.
The purpose of Customer Lifetime Value value is customer retention and satisfaction. It considers a customer's revenue value and compares that number to the company's lifespan. There are two ways to evaluate or measure customer lifetime value.
Historic Customer Lifetime Value
Historic customer lifetime value is looked at from the angle of past events. For instance, if a customer has been buying a 50-dollar item from you for the past ten years, then his customer lifetime value will be $500. The essence of historic lifetime value is understanding the value your customer has brought to your business. You can also use it to profile your customers and understand their needs and behavior effectively. However, when considered alone, this metric could be more helpful in predicting future revenue.
Predictive Customer Lifetime Value
Predictive customer lifetime value is an algorithmic process that uses historical data to predict a customer's relationship as to whether it will last and the amount of value placed on it. It can consider customer acquisition cost, business overheads, average frequency purchasing rate, and other metrics to give you a realistic prediction.
The Importance of CLV Calculation in a SaaS Business
The CLV metric bears a lot of significance in SaaS business, and care should always be taken to measure it accurately. Here are some importance of CLV for SaaS
Business Financial Predictions
CLV helps businesses make financial predictions and accurate market strategy decisions. It can offer insights into future revenue streams and changes in customer behavior. It gives the business owner a clear overview of the business and areas for customer relationship improvement with your brand. The more value a customer brings over time, the more revenue is generated.
Customer Retention
Customer retention is critical as studies have shown that existing customers spend 67% more than new ones. This data should motivate you to find ways to boost customer loyalty and retention. The probability of selling to a paying client is higher than selling to a new customer. Unfortunately, some companies choose to focus more on customer acquisition than on customer retention. By focusing on customer retention, you can stay ahead of the competition. CLV helps you identify impactful trends in your customer data.
Customer Acquisition Cost Reduction
Higher CLV can reduce customer acquisition costs as it costs less to keep an existing customer. To acquire new customers, you may need to reach out to them and employ marketing funnels to get new customers.
For existing customers, they do not need these processes as they have already undergone this process. You must optimize your customer support strategy and loyalty program to meet your customers' needs. CLV is also essential in finding your company's most valuable customer segments.
Understanding Customer Behavior and Spending Patterns
You can use CLV to understand customer behavior, preferences, and spending patterns. This understanding can help you improve your data-driven decision-making, thereby leading to personalized marketing strategies for the growth of your business.
Peace of Mind
Having a positive CLV value can give you peace of mind. The profits coming into your business ensure you can pay your employees, vendors, consultants, utilities, and others to keep your business running.
Understanding the average customer lifespan's revenue generated gives you peace of mind to cater to the business's bills. A good knowledge of your CLV also helps you to plan programs, launches, campaigns, and other activities to support your business.
Profitability
It drives profitability, especially when you keep customers longer and encourage them to spend more on your product; CLV will guarantee that you make reasonable profits.
How to Calculate Customer Lifetime Value
A few things need to be calculated to help us accurately calculate the customer lifetime value. Those things include:
Average Order Value
This metric is derived by dividing your company's total revenue over some time by the complete orders your customers made during that time frame.
Average Purchase Value
To calculate this, you need to divide the company's total revenue in usually one year by the number of purchases throughout that period. This calculation can help you see and analyze the average revenue each customer generates during a period.
This metric also shows you the opportunities to increase the value of each transaction, new options for cross-selling and upselling, and an assessment of the pricing and packaging strategies. It aims to find new, viable products, services, and other methods to increase customer lifetime value.
However, calculating the average purchase value comes with challenges such as inconsistent purchasing patterns, variable customer segments or groups that can skew data, seasonal fluctuations in customer spending behavior, inconsistent data across multiple platforms, and comprehensive data. To get an accurate average purchase value, here are some tips you can try:
- Regularly audit and clean up data to remove errors
- Automate data collection for consistent transaction data
- Integrate channels for a centralized view of customer transactions
- Use a reliable CRM system that combines customer transaction data from different sources
- Prioritize different customer segments
Average Purchase Frequency Rate
You can obtain this value by dividing the total number of purchases by the number of unique customers who made purchases during that period to reveal the customer purchase frequency. The metric also helps you understand customer behavior over some time, customer churn, customer loyalty, and future revenue streams.
The challenges of the frequency rate are that it needs to be completed or consistent data, changing customer buying patterns, and purchase cycle timing. To ensure accurate calculation, conduct customer surveys for insights into reasons behind changing purchase patterns.
Average Customer Lifespan
The average customer lifespan is helpful when calculating CLV because it supports predictions on expected customer relationship with your business. Knowing this will help you determine the return on investment for customer acquisition, optimize marketing strategies, and implement proactive strategies to reduce churn. The average number of years a customer continues purchasing from your company gives you the average customer lifespan; this will then be divided by the total customer base to get the average.
The challenges are the need for a robust data management system, limited customer data, and accuracy in tracking customer lifecycle. To calculate this correctly, include data from different platforms, have a regular trend analysis, use reliable customer service software, and ensure customer satisfaction and loyalty data.
Customer Lifetime Value
To get this right and to identify how much monetary value you can expect to generate from a customer over the life of another relationship with your company. You have to find out the average purchase value for your product and then multiply the average order value by the intermediate purchase frequency and the average customer lifespan, which helps you figure out the customers who have the most significant impact on your business. It allows you to segment customers by their purchasing habits to enable you to create more customized content for your customers.
The challenge with customer value is that data sources may be unreliable and need to be appropriately integrated to reflect the monetary value of each customer. Another challenge is that many businesses have a wide range of customer retention rates, making it challenging to estimate customer lifespan.
To calculate the customer value, you need to have a consistent process for assigning monetary value, feeding on customer feedback, combining financial systems with customer data to show each customer's economic value, and implementing a good CRM for data accuracy.
Customer Acquisition Cost
Although this is not part of CLV formulas, it can be helpful in customer lifetime value analysis because it helps the business owner figure out how to distribute and use resources wisely, determine and discover new ways to improve customer retention and ascertain effective market strategies effectively.
Calculation of Customer Lifetime Value (CLV)
There is no one way of calculating customer lifetime value, which can be overwhelming and confusing, but there are some simple approaches. One way to do this is by multiplying the average order value by the intermediate purchase frequency and the average customer lifespan. The formula is AOV X APF X ACL = CLV.
To illustrate this, a customer visits a pedicure shop every year for pedicure and makes around thirteen visits to the shop every year. He spends $30 at each visit and keeps returning for an average of five years. Following the just revealed formula, the lifetime value is CLV = $30 X 13 X 5= $1,950
Another helpful formula you can use is:
Customer revenue per year X Duration of the relationship in years – Total costs of acquiring and serving the customer = Customer lifetime value.
This calculation is for situations where the figures will likely remain the same year in and out. Your business type, CRM, Point of sale back end, and invoicing system will indicate how you calculate the CRV.
The Core SaaS Metrics That Affect Customer Lifetime Value
These are metrics that measure the performance and growth of your business. SaaS metrics are tailored to meet the needs of sales marketing and customer success. Here are some key SaaS customer metrics affecting customer lifetime value. If you learn how to calculate customer lifetime value with these core metrics, you can increase your SaaS business valuation sustainably.
Activation Rate
This metric informs you of a customer's steps when discovering your value. It directly measures a product's success rate, making it a vital tool for SaaS businesses.
Customer Churn
This metric refers to the measurement of customers who drop a business service within a given period. It is of primary concern, especially to SaaS companies, since they rely heavily on subscriptions. Understanding and determining the churn helps businesses know how and when customers interact with their goods and services, allowing them to form better retention strategies.
Conversion Rate
You need to know how many prospective leads are converted into actual customers. To get the conversion rate, divide the number of customers gained over some time by the total number of visitors or trial users over that same period.
Customer Acquisition Cost
This metric enables businesses to determine how much money they spend on customer acquisition. You need to ensure that the cost of acquiring new customers is most the money your customers generate. To calculate the customer acquisition cost, you divide the total cost of sales and marketing by the number of acquired customers.
Best Customer Retention Strategies You Can Use to Increase Your Customer Lifetime Value
To boost CLV, your company needs to focus on customer satisfaction and customer retention while doing everything to improve the customer experience. To achieve this, here are some things that you can do:
Improved Customer Onboarding
Your customer base has to be brought up to speed with everything concerning your brand; this includes what your brand does, its importance, and why they must stick to your product or services. Once your customer makes their first purchase, the onboarding process should begin.
It would help if you stood out because when your customers return to view your site, they want to learn more about how your company works and why they should keep visiting it. You can follow up with email contacts to track purchases of curated items or new or exclusive deals offered to your customers.
Tools like live chat or knowledge base can make onboarding easy as they help your customers easily find the information and support they seek. In other words, retaining customers long enough to increase their lifetime value starts with a seamless onboarding process.
Personalized Targeted Campaigns
Email or social media marketing is an effective tool for customer retention, especially when the content is meaningful and directed to a specific customer or target audience. The essence is to focus on your ideal customers and keep them engaged with content specifically tailored to suit them. You can also send little gifts that align with their interest. If you do it very well, leveraging personalization will also help you increase your retention rate and improve your customer lifetime value.
Engaging Events and Challenges
Virtual events are avenues to acquire a customer and engage with existing ones. You may only be able to meet them in person or connect with some of them, but you can create engaging virtual events that make them want to return to your site. Besides, you can use virtual events and problem-solving content to create a better customer experience. The more you can educate customers to find greater value in your SaaS products, the better the opportunities to increase your CLV.
Stakeholders
Stakeholders' reviews, comments, and evaluations from different departments can help you have a good business overview.
Referrals
81% of customers trust recommendations from people that they know. Also, some people like to share their new purchases on social networks, which brings new customers to your business. Referred customers have a much higher lifetime value. So, when you acquire a new customer, look for ways to increase the opportunities for getting referrals.
Feed on Customer Feedback
Collecting and collating the necessary data will help you know if your business is performing well or if your customers are satisfied with your products or services. You must create an avenue or a platform for your customers to drop feedback. Always endeavor to reply to mentions, messages, and comments. You will know if your customer plans to recommend you to others and which areas you need to improve.
Listening and responding to feedback can make your customers appreciate your efforts to act on their recommendations. You also commend your customers when they come up with excellent and actionable ideas; you can even think of enjoying them with little tokens.
Customer Service
Good customer service contributes to the growth and profitability of any business as it results in customer retention and improves customer lifetime value. To ensure you get the most out of your customer feedback, use different technological and communication channels, especially those frequently used by your clients.
Ensure that you respond to customer feedback promptly and provide round-the-clock chat support. Always remember that relationships and ongoing connections drive a higher customer lifetime value. Use channels such as emails, phone, live chat, and social media platforms.
Reward Loyal Clients
Calculating customer lifetime value will help you know your best customers. You can then decide to make special offers as a way of fostering good relationships with these. You could use different options, such as easy access to new items or free or cheaper shipping.
Upselling and Cross-selling
This strategy aims to offer better solutions for your customers while increasing their purchase frequency. You can also increase your revenue by advertising or showing your customers complementary products or better options with a higher price or better options.
Automated Support Systems
Live chats, email integration, and chatbox can be great tools to get customer feedback and offer instant responses. They also provide immediate assistance to meet high customer expectations. Across many SaaS niches, faster responses to sales and customer support requests are among the best ways to improve retention rates. Considering that lifetime value is an important metric affecting a SaaS business's valuation, you should endeavor to leverage faster support systems that increase customer loyalty and retention rates.
Self-Service Resources
Customers can be helped to easily and quickly find answers to their questions independently. You can do this with a knowledge base, customer portal, and other self-serve resources.
Refund Policy
Your return policy must be fair, transparent, and committed to customer satisfaction. You must also ensure that this process is stress-free.
Pricing Choices
New and old customers should be given different product packages to choose from; this can make them even opt for higher-priced packages. For instance, as a subscription company, you can encourage your customers to switch to an annual billing cycle, which will help increase your average order.
You can also combine complementary products and offer them at a discounted price; this makes customers want to buy more and increases order value. In addition, you can provide personalized discounts or incentives to your customers. An increase in order value can lead to increased CLV and overall revenue.
Conclusion
Customer Lifetime Value is a critical metric to consider as it gives you insight into customer satisfaction and clues on the best way to embark on customer retention. We can calculate CLV in many ways, and the results we gain from such calculations can affect many of the business strategies we implement.
Frequently asked questions
What is Customer Lifetime Value?
This metric calculates the total revenue a customer will generate for a business over a long period.
Why is Customer Lifetime Value Important?
It is essential because it helps a company forecast profitability and determine goals for growth and improvement.
