What is customer lifetime value? How to calculate the total revenue value for a potential customer? Find out practical tips and increase conversion!
The effectiveness of an advertising campaign is not only determined by the profit from a single purchase, but also by acquisition of new customers. The goal of any online store should be to gain trust in the eyes of consumers, and thus – transform them into loyal customers. How to calculate the profit that a customer generated over a given time period? The answer is the Customer Lifetime Value indicator.
Customer lifetime value, or the lifetime value of a customer
Customer lifetime value is an indicator that tells you how much a customer means to an online store. So, it is the total of revenues that can be generated for the company throughout the entire cooperation period. Knowing how much a customer spends in a given time period helps to find a reference point for measuring the effectiveness of marketing activities.
Advertising campaigns may seem unprofitable if we consider only the cost of acquiring a customer during the first purchase. Taking a look at the entire cooperation process allows for assessing whether the client has actually generated more profit, and thus a return on investment.
Why is it worth calculating the customer lifetime value?
By calculating the customer lifetime value, we can easily optimise marketing activities and resources. The cost of acquiring a client happens to exceed the transaction profit. However, if we consider the entire cooperation, it may turn out that the relationship is profitable.
What are the other advantages of calculating CLV? First of all, getting to know the profitability of a single customer and the opportunity to focus on building his or her loyalty. User retention, i.e. the percentage of people returning to the store, is a very important parameter that determines the company’s success. Low user retention means the need to constantly invest in new customers.
The customer lifetime value can be calculated in at least two ways. For an online store, first of all an average order value (AOV) needs to be computed:
Then we need to calculate a purchase frequency (f), i.e. how many times the customer has made purchases in a given store, e.g. over a year. It suffices to divide the number of last year’s orders by the number of unique users:
Next, we multiply the value of the average customer order (customer value) by the frequency of their purchase:
The next step is to calculate a customer average lifespan (t), i.e. the average time when the customer is active, e.g. the t value is 1 year.
We get the exact specifying number showing how valuable each customer is throughout the entire period of cooperation by multiplying the annual value of customers by the period in which they remain active:
The final figure is very valuable for any business. It tells you how much to spend to get a new customer, and how much to pay to keep him or her.
The second simple method is to calculate the customer lifetime value using the following formula:
CLV = annual revenue generated by the customer x average number of years of customer retention – customer acquisition costs
Annual customer revenue = PLN 2,000
The average number of years of remaining a customer = 3 years
Initial customer acquisition costs = PLN 3,000
CLV = 2,000 x 3 – 3,000 = PLN 3,000
How to increase the customer lifetime value?
By calculating CLV, it is possible to better manage customer relationships in terms of loyalty. User retention is a key term that should be considered when implementing marketing campaigns. How to maximise the customer lifetime value? First of all, it is worth adopting a broad approach to the issue, testing and striving to improve the average order value, average transaction repeatability and retention period.
This can be done through sales techniques such as up-selling and cross-selling, offering free delivery, additional discounts or implementing retargeting campaigns based on customer behaviour.
It is worth using push advertising, email marketing and social media. Push advertising is among the most effective tools, marked by the highest CTR in the media. The increase in the frequency of customers’ purchases is affected by the appropriate segmentation of the subscriber base.
Push advertising gives the opportunity to divide the customer base into specific segments based on their behaviour or characteristic features. This is the first step to customise advertising campaigns, having a huge impact on raising the customer lifetime value.