How do you calculate CLTV?
Customer lifetime value involves multiplying these aspects:
- The average value of their purchases
- A customer’s average purchase frequency
- Your average customer relationship lifespan
Let’s say, for example, that a customer buys from your website twice per week and spends $5 each time over 3 years.
5 x 2 x 52 x 3 = 1,560
The customer’s projected lifetime value based on usage is estimated at $1,560.
Although you’ll find more complex customer lifetime value formulas, you should start with this as a basic rule of thumb.
What is a good CLTV?
Though a higher lifetime value is largely better, what determines a good CLTV will depend on your business type and the industry you’re in.
Assess your CLTV and look at how our competitors fare. Once you have gathered this information, consider how you might use it to refine your approach.
How can businesses increase CLTV?
Once you’ve assessed your CLTV, knowing how to increase it is important. While focusing on specific outcomes is crucial to manage rates, it’s important to recognize the potential impact of multiple indirect factors on rate fluctuations.
Implement each of the following if you’re not happy with your current average customer lifetime value.
- Invest in the customer experience: Understand each person’s needs and how your products/services can address these. Use the data you have to finetune your messaging, and segment in the backend if needed.
- Loyalty programs might be worth considering; these programs have the potential to impact customer spending habits, but the actual impact may vary. Use different loyalty tiers to incentivize customers to reach the next level.
- Personalized marketing: Personalize your communications by using the customer’s name and recommending products/services similar to what they’ve used in the past.
- Customer understanding: Emphasize gaining insights into customer needs and ensuring your offerings align with those needs; leverage data to drive enhancements and contribute to customer satisfaction.
How can you use CLTV to segment customers?
Customer lifetime value is a way to segment customers by revenue generated. Generally speaking, you should divide them into at least three groups – though you can segment these further if needed.
Here are the key ways to segment customers:
- High-value customers: Tailor your messages to people with higher CLTV; do not rest on your laurels.
- Low-value customers: Identify their buying behaviors, what they purchase, and how they tend to buy items.
- At-risk customers: Directly reach out to these customers. You should also find out whether they have any tips for what would make them more likely to purchase from you in the future.
What are some real-world examples of companies successfully using CLTV?
Before developing your own CLTV protocols, have a look at brands already using this in the real world. Amazon, Netflix, and Starbucks are three such examples.
- Amazon: Customers receive personalized recommendations based on their shopping history. For example, someone who has previously purchased a bed might also receive recommendations for an alarm clock or bedside table.
- Starbucks: A reward system at Starbucks awards points to individuals who buy their coffee.
- Netflix: Adding series to the catalog.
What are some common mistakes businesses make when calculating or using CLTV?
When using CLTV and calculating it in your business, avoid the common pitfalls that other businesses make. Data quality is essential, as is understanding revenue streams.
- Revenue streams: CLTV applies to all of your revenue streams, and you therefore need to assess each of them – even if some make less money for you than others.
- Customer churn: Factor the customers that leave into your CLTV calculations and determine how to reduce your churn rate.
- Data: Avoid using bad data for a database; all information must be up-to-date and from reputable sources.
How is CLTV impacted by changes in the market or industry?
CLTV can be impacted by various changes, such as:
- Competition
- Economic changes
- Changing customer demands
Stay informed on industry and economic alterations and make adjustments when you feel like doing so is necessary.
What are the limitations of CLTV?
Though CLTV is useful for determining customer value, it isn’t foolproof. Understanding what it is and isn’t good at is vital if you want to use it more effectively.
- Accuracy: Remember that CLTV is a prediction based on past data. You can use it to guess future trends, but it’s not guaranteed to be correct.
- Measuring: Consider the complexities associated with accurately guessing CLTV and address these as required.
- Capturing: CLTV is useful for assessing revenue but not referrals or customer sentiment.
Conclusion
Customer lifetime value is an important consideration for businesses who want to strengthen relationships with their customers, but it’s not an all-around solution. Use it to understand the average revenue generated per customer and how to improve this metric if it’s too low.
Segmenting customers is a key part of CLTV measurement and implementation. Personalize messages based on how much they spend with you and ask at-risk customers what you can do to appeal to them. Consider other metrics, such as sentiment, for a broader picture.
