All those who have a business that represents their life's work need to know this.
Because surely they have so many metrics that are "key" to them that they cannot even keep track of their full names.
One encompasses a combination of several and represents the soul of your business. Don't tell me you didn't know that your business can have a soul…well, it can and it's called Customer Lifetime Value (CLV). We all want to have as many new customers as possible every month who will become our long-term consumers.
It's all fantastic. But to make that happen, you need to put in some effort.
There is one key difference between new and old, between new and old customers.
Old customers are more profitable.
It's nice to want to acquire new customers. You just have to be careful not to lose the old ones in the process because it takes 7x more money to acquire a new customer than to retain an old one.
This is where CLV comes in.
What is the customer lifetime value (CLV)?
Customer Lifetime Value (CLV) is a KPI that is best understood. It’s a measure of how much revenue a single customer generates throughout their relationship with your business. This is a valuable metric because it allows you to understand how much money you need to invest to acquire a new customer and retain an existing one. By understanding the value of each customer to your business, you can develop strategies that focus on building long-term relationships with your customers, instead of just trying to make one-off sales.
Here's a clear example.
The CLV of a luxury Mercedes owner can be $100,000 if they are satisfied with their car. However, someone who buys luxury clothing or footwear may have a higher CLV. It depends on how often they make purchases and the average order value.
If you expect the estimated CLV of your customer to be $500, you should not spend more than that to acquire or retain them as a customer. It simply isn't cost-effective.
Benefits of knowing Customer Lifetime Value
This means creating personalized experiences, offering exclusive promotions and discounts, and providing exceptional customer service that keeps them returning for more. When you focus on building these long-term relationships with your customers, you'll not only increase their lifetime value but also improve the overall profitability of your affiliate marketing efforts.
Knowing the CLV of different types of customers can contribute to making very important decisions.
Here are some aspects that you can determine thanks to knowing the CLV:
- The maximum amount you can spend to acquire a customer and still be profitable
- The expected lifetime value of an average customer
- The preferences of high CLV customers in terms of product selection
- The products with the highest profit margins
- The customer segments responsible for the majority of sales
- Identification of the most profitable customer types
- Utilizing CLV to gain insights into loyal customer behavior and preferences
How to calculate customer lifetime value (CLV)?
To calculate the CLV of a customer, you need to know several factors and their definitions. These are:
- Average order value: This is the amount of money a customer spends each time they place an order. To calculate this, divide the total revenue by the number of orders.
Average order value = Total revenue / Number of orders
- Purchase frequency: This is the average number of purchases made by each customer. It represents how often they buy from you.
Purchase frequency = Total number of orders / Total number of customers
- Customer value: This is the average value that each customer brings to your company over a certain period.
Customer value = Average order value x Purchase Frequency
Once you have these three metrics, you can use them to calculate the CLV of a customer.
The formula is:
CLV = Customer value x Customer "lifetime"
How to calculate the Customer lifetime value-example
Here's a simple example to help you understand how CLV can be calculated:
Let's say you run an online clothing store and the average customer spends $50 on their first purchase. Based on your sales data, you know that customers tend to make 3 purchases on average throughout their relationship with your brand. Additionally, you have data that shows the average customer stays with your brand for about 2 years before churning. To calculate CLV for this example, you would multiply the average purchase amount by the number of purchases per year (3 purchases / 2 years = 1.5 purchases per year) and then multiply that by the average customer lifespan (2 years).
So in this case, the CLV would be:
$50 average purchase amount x 1.5 purchases per year = $75 annual customer value
$75 annual customer value x 2-year lifespan = $150 customer lifetime value
So the CLV for this example is $150.
This means that, on average, each customer is worth $150 to your business throughout their relationship with your brand.
Tactics for Maximizing CLV in Affiliate Marketing
The chances that you will sell your product to someone who is already your customer can be 60% to 70%, while the chances of selling something to a new customer are 5% to 20% according to eConsultancy. You don't even have to think too much. We have singled out several tactics that you need to adapt to yourself and your business and CLV growth is guaranteed.
Here are some proven tactics:
- If you create barriers or high costs for customers returning items they bought from you, it can greatly decrease the likelihood of them returning to make future purchases. Therefore, it is important to simplify and streamline the return process to make it easy and convenient for your customers.
- It is wise to make selective exceptions for your most devoted customers. For instance, if a customer intends to cancel a subscription service you provide, consider offering them a special incentive to remain a user, such as a minor discount or other exclusive benefits.
- Each touchpoint where your customers interact with your business, such as your website, storefront, and call center, contributes to their overall experience. Providing a seamless, stress-free shopping experience across these touchpoints can foster a positive perception of your brand and encourage customers to engage with your business again in the future.
- Negative customer service experiences can rapidly diminish customer lifetime value (CLV), leading customers to defect to competitors. By prioritizing exceptional customer service at every touchpoint, businesses can build stronger customer loyalty. Employing customer relationship management (CRM) systems and dedicated service platforms can centralize customer interactions, facilitating efficient management of customer service processes.
- Customer retention and expansion strategies, such as upselling and cross-selling, can be more effective and cost-efficient than customer acquisition efforts. These tactics aim to entice existing customers to purchase higher-priced or multiple products or services in a single transaction, rather than opting for lower-cost alternatives.
- Strategic price increases can have a positive impact on customer lifetime value (CLV) when executed thoughtfully. However, it is important to avoid dramatic price hikes that may deter customers. Researching competitor pricing can inform your pricing decisions while emphasizing the value proposition and offering unique benefits can justify higher prices and foster customer loyalty.
- Establishing realistic delivery expectations and exceeding them can enhance customer satisfaction and loyalty. By promising a delivery date earlier than the target date, businesses can create a positive impression among customers and mitigate any potential disappointment caused by delays or unforeseen circumstances.
- To capture the attention of customers, businesses should leverage channels where customers are already active. Social media platforms, such as Facebook, Instagram, Twitter, and TikTok, provide ample opportunities to engage with customers and promote products or services. By utilizing these channels, businesses can effectively advertise and interact with customers, thereby strengthening relationships and enhancing brand recognition.
- Simplifying the purchasing experience can reduce cart abandonment rates for online businesses and enhance customer satisfaction for in-person sales. Employing techniques such as A/B testing can identify optimal strategies for boosting sales.
- Content marketing is a customer-centric approach that aims to cultivate brand loyalty and credibility by providing educational or engaging materials that align with the interests and needs of the target audience. Tailored content, such as blog posts, e-books, videos, and podcasts, can resonate with specific customer segments, reinforcing brand messaging and strengthening customer relationships.
- Providing incentives, such as complimentary products or services, can effectively foster brand loyalty among customers. By offering freebies to customers, businesses can demonstrate their appreciation and create a positive association with their brand. This can encourage repeat business and foster a long-term relationship between the customer and the brand.
Tools and techniques for tracking CLV customer behavior
This is the age of and many CLV tracking and monitoring tools are already integrated and can provide automatic results. In addition, there are some software and algorithms that enable automated marketing and sales as well as managing user data.
We have selected some that can help you:
- Customer Relationship Management (CRM) software - CRM systems help businesses to gather and analyze customer data, allowing them to track customer interactions, purchases, and preferences.
- Predictive analytics - Predictive analytics uses statistical algorithms to analyze customer data and predict future behavior, including the likelihood of future purchases and the estimated value of each customer.
- Customer surveys and feedback - Collecting customer feedback and conducting surveys can provide valuable insights into customer behavior and preferences, allowing businesses to tailor their offerings to better meet customer needs.
- Purchase history analysis - By analyzing purchase history data, businesses can identify patterns and trends in customer behavior, such as preferred products or buying habits.
- A/B testing - A/B testing involves comparing two versions of a product or marketing campaign to determine which is more effective. By using A/B testing, businesses can optimize their offerings to better meet customer needs and preferences.
- Web analytics - Web analytics tools, such as Google Analytics, can provide insights into customer behavior on a business's website, including which pages customers visit, how long they spend on each page, and which products they view or purchase.
Understanding CLV in your business will ultimately help you understand your business. You will have first-hand information on which type of customers you should focus on. Planning your budget for acquiring new customers will be very easy. Take advantage of technology and start tracking and analyzing data today. In other words, catapult your ROI into the sky.
Customer lifetime value FAQ
- What is customer lifetime value (CLV)? Customer Lifetime Value (CLV) is a metric used to determine the total amount of money a customer is expected to spend on a company's products or services throughout their relationship with the company.
- Why is CLV important? CLV is important because it helps businesses determine the long-term value of their customers, which can guide marketing and sales strategies, as well as help companies better understand their profitability and return on investment.
- What is the customer lifetime value (CLV) formula? Although the calculation of customer lifetime value (CLV) can be more intricate in certain situations, the fundamental formula is: multiplying the average value of a customer’s purchase by the number of times they are expected to purchase within a given year and then multiplying that by the projected average duration of the customer’s relationship with the business (in years).
- Example of CLV? Let's say that a company calculates that the average value of a customer's purchase is $50. Based on their historical data, they expect that a typical customer will make 3 purchases per year. They estimate that their average customer stays with them for 5 years.
Using these numbers, the company can calculate the CLV for a typical customer as follows:
CLV = $50 (average purchase value) x 3 (number of purchases per year) x 5 (average length of customer relationship) CLV = $750
This means that the estimated lifetime value of a typical customer is $750.
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