Customer lifetime value is an often overlooked metric that can in reality make a big difference when growing a business and increasing revenue. In this article, we will discuss what customer lifetime value is, how to calculate it and how to increase it.
What is the Customer Lifetime Value Formula?
Customer lifetime value is the revenue that can be expected to be made from a customer in the time period of their business relationship. This can be calculated by multiplying the customer’s value by the average customer lifespan. Once one has this information, one can have a more accurate idea of who your ideal client is and focus on those client acquisitions. To get to the point where one can make use of the customer lifetime value formula, one must make a few other calculations. They consist of:
- Average Purchase Value = Total Revenue ÷ Number of Orders
- Average Purchase Frequency Rate = Number of Purchases ÷ Number of Customers
- Customer Value = Average Purchase Value x Average Purchase Frequency Rate
- Average Customer Lifespan = Sum of Customer Lifespans ÷ Number of Customers
- Customer Lifetime Value = Customer Value x Average Customer Lifespan
How to Increase Customer Lifetime Value
Increasing one’s customer lifetime value is a great way to increase revenue over time and can actually lower the costs of new customer acquisition. This is a growth strategy that will work when done correctly but is also one that takes a little longer. Here are some ways in which you can start to improve your customer lifetime value:
- Improve Customer Onboarding: After a customer makes their first purchase the onboarding process starts. This is where customers get to know your company. It is also the first step to impressing your customer. It’s important to ensure that your onboarding process runs like a well-oiled machine and doesnt leave your customer wondering about anything. It should feel to the customer as if you are reading their mind and providing them with what they want or need before they can even ask for it.
- Increase Average Order Value: If you can increase your average order value it will automatically increase revenue and in return the customer lifetime value. This can be seen in all the optional extras one can choose when checking out an online store. It is also visible in small purchases such as screen protectors and covers when purchasing a phone.
- Strengthen Customer Relationships: Customers are craving personal connections with brands. They don’t want to be treated like a number and they are looking for long-term relationships with brands that suit their values. Thus it is important to build customer relationships and increase trust.
- Listen to Advice Given: Customers often give advice and suggestions on how to improve certain aspects of your business. It is important to take a step back, be open-minded, and listen to your customers, they will often have very valid suggestions. This will also make your brand more appealing to your ideal customers as you are tailoring products and services according to their wants and needs.
- Be Responsive: It has been shown that brands that respond efficiently and quickly to requests (within an hour) have an easier time selling to their clients and increase customer satisfaction as a whole.
- Focus on Customer Service: You might think that customers only look at quality and price when shopping for a product or service; however, customers also take customer service into account when making their decision. This is why it is so important to ensure that your customer service is top-notch!
Contact the Leadtrekker team to see how our CRM can help you increase your customer lifetime value.