Calculate your Customer Lifetime Value
Customers are the lifeblood of your business. As a business owner, you need to pay special attention to retaining your customers, while you attract new customers. In the meantime, you should learn how to get customers to add more value to your business as well.
This is where you need to pay extra attention to Customer Lifetime Value. Customer Lifetime Value, which is also known as LTV can be considered as one of the most prominent metrics, which you can use to determine the growth of the company. With Customer Lifetime Value, you will be able to measure the cost of customer acquisition as well. Therefore, your business can understand the time that is taken for you to recover your investments and earn new customers. This is all about determining the cost of marketing and sales in an effective manner.
If you need your business to attract and retain highly valuable customers, you need to focus on Customer Lifetime Value. Then you can figure out the nature of the impact that they can create on your business at the end of the day as well.
What is Customer Lifetime Value?
To begin with, let’s have a solid understanding of what Customer Lifetime Value is. Customer Lifetime Value is the metric, which indicates the complete revenue that a business can expect through a single customer account. In here, the revenue value of the customer is considered, when compared to the predicted lifespan of the customer. With the help of this metric, businesses are provided with the opportunity to understand the different customer segments, which can add more value to the company.
In simple terms, Customer Lifetime Value helps you to get a better understanding of the total revenue that you can expect one single customer to generate. This is calculated over the course of the complete business relationship. If the customer continues to purchase your products or services for a longer period of time, the Customer Lifetime Value will be much high.
Customer Lifetime Value will be something that the customers support. In addition, the success teams will be able to create a major impact on this throughout the journey of the customer. The customer success managers and the customer support reps also play a major role in here. That’s because they are in a position to solve the problems that your customers will come across. By doing that, they can encourage your customers to stay longer with your business and contribute more towards the overall success of your business.
How do you calculate Customer Lifetime Value?
Now you have a clear understanding of what Customer Lifetime Value is all about. With that in mind, you should figure out how to calculate Customer Lifetime Value.
In order to calculate the customer value, you need to calculate the average customer purchase value. Then you need to multiply the number you have by the average purchase frequency rate. By doing that, you can effectively determine the overall customer value. In other words, you can end up calculating the Customer Lifetime Value for a specific customer.
Understanding the Customer Lifetime Value model
If you are not good with math, you can take a look at these step by step instructions on how to calculate Customer Lifetime Value. All you have to do is to follow these steps and you will be able to end up with positive results as you expect.
- To begin with, you need to calculate the average purchase value. In here, you should get your total company revenue and divide it by the number of purchases that take place throughout the same period. Then you can end up with a figure, which is the average purchase value of a customer.
- Now you need to calculate the average purchase frequency rate. To do that, you need to divide the total number of purchases that take place throughout a specific period of time. In here, you need to make sure that you divide by the unique customers that you have. You should ignore the repeat customers.
- Now you have all the data available to go ahead and calculate customer value. You can simply multiple by the average purchase frequency rate by the average purchase value.
- You should then understand how to calculate the average customer lifespan. You can easily calculate the amount by averaging the total number of years that a customer would keep on purchasing products or services offered by the company. By taking a look at the needs of a customer and the nature of product or service that you offer, you can end up calculating this figure.
- Then you calculate the Customer Lifetime Value. You have to multiple average customer lifespan by the customer value that you will end up with in step 3. This can provide you with a clear estimate on how much revenue that you can expect for a single average customer to generate for your business throughout a specific period of time. Then you can develop a strong relationship with your customers accordingly.
An example on calculating Customer Lifetime Value
Here’s a great example, which you can use in order to calculate Customer Lifetime Value. You already know the steps that need to be followed in order to calculate Customer Lifetime Value. With that, you can go through this example, which acts as a hands on experience in helping you to learn how to calculate Customer Lifetime Value.
To do the calculation, we will be getting information from a Kissmetrics report. In here, we will be calculating the Customer Lifetime Value of a Starbucks customer. It will not be possible for you to get a better understanding by just taking a look at the purchasing habits of a single customer. Therefore, it is recommended to consider five customers at a time and then get the average value of the figure that you end up with.
Here are the steps that need to be followed.
- Step 1 – Calculate the average purchase value
The first step is all about calculating the average purchase value. In here, you need to get Data and figure out how much a customer is spending at Starbucks at each visit. On an average visit, a customer spends around £5.90 to purchase something offered by Starbucks. It is possible for us to calculate this by averaging the total amount of money that a customer spends throughout a week. For example, if you are visiting Starbucks three times a week, and if you spend a total amount of £9 during those three visits, the average purchase value of you would be £3.
After you end up calculating the average purchase value for a single customer, you can go ahead and repeat the same for five customers. Then you can add the average value of each customer and divide the amount that you get by five. This can help you to get a realistic understanding about the average purchase value.
- Step 2- Calculate the average purchase frequency rate
The next step would be to go ahead and calculate the average purchase frequency rate. In this considered example, you are taking a look at the total number of times where the customer is visiting Starbucks. The average will be observed among all four customers. According to the report, the average purchase frequency rate was identified as 4.2.
- Step 3- Calculate the average customer value
Now you have both figures that are needed to calculate average customer value. However, you need to make sure that you are considering the five customers individually. You have the average purchase frequency rate and average purchase value information of each and every customer. Therefore, you need to go ahead and calculate the average customer for each and every customer separately. This can help you to get a better understanding about the total revenue that a customer can bring into Starbucks within a week.
You can repeat the calculation for all five customers and average the values that you get. Then you will notice that the average customer value is around £24.32.
- Step 4 – Calculate the average customer lifetime span
The next step would be to calculate the average customer lifetime span. In here, the average customer lifetime span would be 20 years. To arrive at this figure, we need to consider how many years a person would keep on purchasing products that are offered at 20 years. As per the example, it is 20 years. However, you don’t need to wait for 20 years to verify this fact. You can easily estimate this by dividing 1 by the churn rate percentage of the business.
- Step 5- Calculate Customer Lifetime Value
With all the figures that we ended up with, we are in a position to go ahead and calculate the Customer Lifetime Value. In here, we first understood that he average customer value. Then you need to multiple that value by 52. That’s because we had a look at the weekly habits of Starbucks customers and you need to make sure that you are calculating Customer Lifetime Value per yearly basis. Then you can multiply the value that you end up with customer lifespan value, which is 20 according to the example.
When you take a look at the scenario of Starbucks, you will notice that the total Customer Lifetime Value will be £25,272. It depicts that a single customer of Customer Lifetime Value is worth £25,272 throughout his lifetime.
How to improve Customer Lifetime Value
Now you are aware of how to calculate Customer Lifetime Value. If the Customer Lifetime Value is high, you will be able to receive a large number of positive results for your business endeavors. This is where you should learn how to improve your Customer Lifetime Value. There are some effective methods available for you to get the job done. Here are couple of methods, which you can follow to improve Customer Lifetime Value.
- Improve customer satisfaction
Improving customer satisfaction is one of the most prominent methods available for you to Customer Lifetime Value. In here, you need to think about making your customers happy. When the customers are happy, they will tend to spend more money on your company as well.
This fact has been proven according to a research that was conducted by Hubspot. According to research stats, more than 55% of the growing companies believe that it is extremely important to invest money accordingly on the customer service programs. They can make the customers feel happy and get them to spend more money on the business.
The companies that heavily invest on making the customers happy experience a significant revenue at the end of the day. Therefore, it can be considered as one of the best investments that a company can make.
- Improve customer retention
Secondly, you need to think about improving your customer retention. As you already saw, acquiring customers can be expensive. You will have to spend a considerable amount of money on promotional campaigns in order to acquire new customers. If you are not in a position to do it, you need to focus more on improving customer retention. If you can improve your customer retention by 5%, you will be able to increase your profits by around 25% to 95%. Therefore, you will be able to get the most valuable customers to interact with your company. While you do that, you can also increase the revenue, which can directly contribute to increasing Customer Lifetime Value.
Customer Lifetime Value is something that every business owner should be aware of. Then you will be able to focus on how to improve the Customer Lifetime Value, which can contribute towards the future success of your business. It can contribute a lot towards the overall success and stability of your business.