How to Calculate the Lifetime Value of Your Customer

Winning new customers is great, but retaining them is a whole different ball game. Unfortunately, this is something many overlook—44% of companies spend more time acquiring customers, while only 18% of them focus more on retaining them.

To achieve steady growth and stability, you need to harness the power of customer retention. Why? 

• While businesses have a 5% to 20% chance of selling to a new prospect, they have a 60% to 70% chance of selling to an existing customer.
• 80% of your future earnings will come from just 20% of your current customers.

Your customers aren’t just worth the amount of money they spend on your product—they can provide long-term value for your business. So how do you exactly identify and cultivate this longevity? 

Before you start throwing various marketing strategies on the table, let’s focus for a minute—how’s your data looking? In other words, what’s your customer lifetime value (CLTV)? 

If you’re scratching your head, we’ve got you covered. Here’s everything you need to know to calculate the lifetime value of your customer. Use this to proactively safeguard the viability of your business. 

Customer Lifetime Value (CLTV)

CLTV is the total amount a customer will spend throughout their relationship with your business. The longer a customer sticks with your brand, the greater their CLTV grows. 

Why It Matters

CLTV is a powerful metric that helps you identify the amount of time and effort it will take to retain a customer. 

For example: 

• If your customer lifetime value is high, your customer likely loves your business and will continue to buy from you. As a result, moving them down the funnel should be smooth sailing. 
• If your customer lifetime value is low, your customer is likely a passive buyer who simply did a one-time purchase. Therefore, you’ll need to invest more time and effort to engage them. 

Though acquiring new customers should be an ongoing endeavor, keep in mind, this costs five times more than retaining customers. Therefore, the more you can boost your CLTV, the higher retention and earnings you’ll have in the long run. 

Knowing your CLTV allows you to prioritize your customers more accurately and understand exactly the types of customized marketing strategies you need to execute. 

How Do You Calculate Your CLTV?

There are five steps to calculating your CLTV: 

1. Calculate Your Average Purchase Value

Find out your average purchase value by taking your business’ total revenue in a given time period (week, quarter, year, etc.) and dividing it by the number of purchases during that time frame. 

2. Calculate Your Average Purchase Frequency Rate

Find out the number of purchases you had in a given time frame. Divide those purchases by the number of customers who made purchases within that time. Be sure to only count a customer once, even if they’ve made more than one purchase. 

3. Calculate Your Customer Value

Multiply the average purchase value (your result from step 1) by the average purchase frequency rate (your result from step 2). 

4. Calculate Your Average Customer Lifespan

How many years does your customer relationship typically last? How many years did they buy from you? Note this number. 

5. Calculate Your CLTV

Multiply your customer value (your result from step 3) by the average customer lifespan (your result from step 4). 

The result reflects the revenue you can expect to earn from the average customer over the course of their lifetime. 

Customer Acquisition Cost (CAC)

Let’s kick your data up a notch. While understanding your CLTV is vital in cultivating customer loyalty, to really get a comprehensive look at your investments, you need to bring in another metric—your customer acquisition cost. 

Customer acquisition cost (CAC) is the cost of converting a prospect within a period of time. This might include sales and marketing costs, like advertising, content, and SEO, used to nurture your target audience. 

CAC is calculated by taking the cost spent on acquiring customers (sales, marketing, onboarding, etc.) and dividing it by the number of customers acquired during the period that money was spent. 

Why It Matters

By measuring CLTV in relation to (CAC), you can find out: 

• How your CAC compares to your CLTV (is the cost to acquire a new customer more than the value they provide?) 
• How long it takes to regain the investment needed to acquire a new customer
• How effective your sales and marketing efforts are

You want your CLTV to be higher than your CAC. This indicates your cost of earning a new customer is less than the value they provide to your business. The results? More profit and longevity. 

How Do You Improve Your Customer Lifetime Value?

Once you’ve calculated your CLTV and looked at your CLTV/CAC ratio, you should have a good understanding of where your business stands. Does your CLTV need a boost? If so, how can you improve it? 

Though there are several ways to boost your customer lifetime value, there are two key things you can’t afford to overlook. 

1. Offer High-End Customer Service

Offering a positive customer experience is pivotal when it comes to increasing your customer retention. The better experience you provide, the more trust and loyalty you can win. 

Good customer service isn’t just about smiling and answering questions—it’s about understanding your customer’s needs and buying habits to offer a personalized experience they will appreciate. 

This might require tapping into: 

• SEO (search engine optimization): What kind of strategies are your competitors using? What kind of pain points are they looking to smooth out? SEO can help you find out and continuously keep your brand relevant to your customers. 
• Social media marketing: Where are your customers hanging out? What are they saying about you? By implementing social media listening tools (via Hubspot, Hootsuite, Social Mention, etc.), you can pick out relevant conversations and respond to customer queries. 
• CRO (conversion rate optimization): Are some of your customers ditching your site due to a poor user experience?  Where are they exactly getting stuck? CRO tactics can help you find out. Based on your findings, you may want to implement features like live chat, CTA buttons, or “similar item” notifications to boost your onsite experience. CRO tools have an average ROI of 223%.
• Marketing automation: Timing is essential in your communication. Part of nurturing your customers involves sending out the right messages at the right time. Whether that’s sending out a reminder email or a unique product promotion to those who bought certain items in the past, use marketing automation software to build relationships. The majority of businesses earn ROI within the first year of using marketing automation. 

2. Focus on Quality over Quantity

Let’s face it, there’s a lot of content and sites out there. Breakthrough the noise by investing in quality. Instead of going wider, go deeper. Start by focusing on a few things, but do those things well. 

This may involve: 

• Iterations. Achieving high-quality work requires several iterations. For example, rewriting the contents of your web page should involve feedback from various teams and frequent testing. Not only does this help you produce value-packed content, but it also lowers the risk of failure. 
• Personalizing each stage of the customer journey. Some customers might be more seasoned than others. You should have a good understanding of where they stand in your customer journey. Not to mention, you should have unique pieces of content/experiences to share in each phase. This might entail segmenting your contacts based on their buying activity or sending out surveys to see what your customers want from your business. 

Connect More & Earn More

After a rough 2020, time and quality are of the essence. And that time is now. What are some ways you could amplify your strategy to improve your customer lifetime value? 

If you’d like a sounding board for your ideas, we’re all ears. Centered on trust and customized strategies, our digital marketing team is ready to help you conquer your goals. Reach out to us today!