Customer lifetime value defines how much a single customer is worth to your business (value) over their “lifetime” as your customer. Seems simple enough, but how do you determine what that is, and why does it matter to your marketing?
Customer Lifetime Value Can Be Calculated in Multiple Ways
The most common method is taking the ‘Average Value of a Sale’ x ‘Number of Transactions’ x ‘Retention Time Period’. As an example, let’s look at a hypothetical business. A local clothes retailer whose average gross sale is $35, whose average customer shops with them 4 times a year, and is usually retained for 3 years. So CLV would be $35 x 4 x 3 = $420.
Customer Lifetime Value is Not Profit
CLV is based on gross sales, and does not deduct cost of the good sold, overhead, administrative expenses, & marketing. However, if you can calculate your profit margin, you can use it along with the CLV to determine how much you can spend to acquire a new customer without losing money.
How Can You Improve & Increase Your CLV?
All strategies should be focused on accomplishing one of the following:
- Increase the value of an average purchase
- Increase the the number of times the average customer visits
- Increase the length of time the average customer is retained.
Ideas for achieving #1 could include providing a new complementary product or service. If your average purchase is an item like a winter coat, can you sell winter gloves that match the coat? If you are a dentist & do teeth cleaning, can you offer a teeth whitening 25% off if they do it at the same time?
Ideas for achieving #2 could include creating a loyalty program that provides discounts or free products after X number of visits or by offering a “bounceback” coupon when a guest makes a purchase to drive an incremental visit.
Ideas for achieving #3 could include investing in a CRM. Using a CRM can help you offer better service & a consistent experience that will keep customers coming back longer. You could also target your highest-value clients. Marketing specifically to your most loyal customers who are the most likely to stay with you & make larger purchases.
If you are looking for more ideas to increase your CLV or want help planning out the details of your plan, consider setting up a Base Camp Consultation with us. We’d be happy to guide you up this marketing mountain.