It's easier to sell to an existing customer than it is to acquire a new one.
The last thing you want is for customers to churn before you recoup the investment required to earn their business in the first place.
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One of the best ways to fix retention issues is by measuring customer lifetime value (CLV or CLTV). Doing so will help your business acquire and retain highly valuable customers, which results in more revenue over time.
Continue reading or jump ahead:
- What is customer lifetime value (CLV)?
- Why is customer lifetime value important?
- Customer Lifetime Value Models
- Customer Lifetime Value Formula
- Customer Lifetime Value Metrics
- Customer Lifetime Value Example
- Tips to Increase Customer LTV
What is customer lifetime value (CLV)?
Customer lifetime value (CLV or CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.
The metric considers a customer's revenue value and compares that number to the company's predicted customer lifespan.
Customer LTV is something that customer support and success teams can directly influence the customer's journey.
The longer your customer continues to purchase from your company, the greater their lifetime value becomes.
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Why is customer lifetime value important?
- Increasing CLV can increase revenue over time.
- It can help you find issues so you can boost customer loyalty and retention.
- It helps you target your ideal customers.
- Increasing CLV can help reduce customer acquisition costs.
- CLV can simplify financial planning.
- CLV trends can show you how to improve your products and services.
Customer lifetime value helps you understand the growth and revenue value of each customer over time. This metric is important to any business because it can help your business:
- Boost customer loyalty
- Reduce churn
- Improve strategic decision-making
For example, you can use customer lifetime value to find the customer segments that are most valuable to your company.
Here are some other reasons why understanding your CLV is essential.
1. Increasing CLV can increase revenue over time.
The longer the lifecycle or the more value a customer brings during that lifecycle, the more revenue a business earns.
Therefore, tracking and improving CLV results in more revenue.
CLV helps you find the specific customers that contribute the most revenue to your business. You can use this information to segment your audience by the value those customers bring.
Once you find those customers, you can encourage repeat purchases and find specific cross-selling and upselling opportunities for different segments of your audience. Or you can tailor your products or marketing to your highest spenders to keep them coming back for more.
2. It can help you identify issues so you can boost customer loyalty and retention.
If CLV is a priority in your business, you can use it to identify impactful trends in your customer data. This insight can help you stay ahead of competition with action items to address those changes.
CLV helps you understand customer behavior, preferences, and spending patterns. With this analysis, you can improve your data-driven decision-making. This leads to more personalized marketing strategies for growth.
For example, say your CLV is low. You can work to optimize your customer support strategy or loyalty program to better meet the needs of your customers. Or you can optimize a new product to attract higher-value customers.
3. It helps you target your ideal customers.
Customer lifetime value tracking makes it easier to segment your customers. You can segment based on profitability, customer needs, preferences, or behavior.
When you know the lifetime value of a customer, you also know how much money they spend with your business over some time — whether it's $50, $500, or $5000.
Armed with that knowledge, you can develop a customer acquisition strategy that targets customers who will spend the most at your business. You can personalize marketing to attract and retain them, and effectively allocate resources to get the most value from your efforts.
4. Increasing CLV can help reduce customer acquisition costs.
Acquiring new customers can be costly, and it's less expensive to retain a customer than it is to acquire a new one.
Customer lifetime value can help reduce costs with a focus on retaining existing customers. If you can keep a customer happy long-term, then you can improve their value to the business.
Using CLV metrics can improve customer loyalty and word-of-mouth referrals — it can also reduce marketing and sales expenses.
5. CLV can simplify financial planning.
The financial health of a business is often a big concern for CEOs and business owners.
Customer lifetime value helps you get a clear picture of your customers' relationship with your business and products. It can offer insights into future revenue streams and changes in customer behavior.
This knowledge can help you make more accurate predictions about future cash flows. So, CLV helps you reliably forecast revenue and plan the financial future of your business.
6. CLV trends can show you how to improve your products and services.
Understanding CLV can give you a better understanding of the value customers get from specific products or services.
With insights from your CLV you'll have a clear direction for further analysis. This may guide you to look at customer feedback and behavior, update pain points, or change your approach to product development.
Lifetime value data can help you find where to make key improvements that align with customer needs and boost satisfaction. This not only strengthens customer loyalty but also differentiates your company from competitors.
Now that we understand the importance of customer lifetime value, let's talk about the two main customer lifetime value models.
Customer Lifetime Value Models
There are two models that companies will use to measure customer lifetime value.
Choosing between the two can result in different outcomes.
This depends on whether a business is looking at pre existing data, or trying to figure out the future behavior of customers based on current circumstances.
Predictive Customer Lifetime Value
The predictive CLV model forecasts the buying behavior of existing and new customers using regression or machine learning.
Using the predictive model for customer lifetime value helps you better identify your most valuable customers, the product or service that brings in the most sales, and how you can improve customer retention.
Historical Customer Lifetime Value
The historical model uses past data to predict the value of a customer without considering whether the existing customer will continue with the company or not.
With the historical model, the average order value is used to determine the value of your customers. You'll find this model to be especially useful if most of your customers only interact with your business over a certain period.
But because most customer journeys are not identical, this model has certain drawbacks.
Active customers (deemed valuable by the historical model) might become inactive and skew your data.
In contrast, inactive customers might begin to buy from you again, and you might overlook them because they've been labeled "inactive."
Read on to learn about the different metrics needed to calculate customer lifetime value and why they're important.
Customer Lifetime Value Formula
The customer lifetime value formula is Customer Lifetime Value = Customer Value x Average Customer Lifespan. The CLV result is the revenue you expect an average customer to generate during their relationship with your business.
Typically, lifetime value (LTV) calculates the overall value of all customers. But customer lifetime value (CLV) can also focus on the business value of specific customers or groups of customers.
The formula above is the standard formula to calculate CLV. But finding this important figure can be more complicated than it looks.
For example, the first time HubSpot marketing manager Jana Rumberger calculated customer lifetime value, it was a direct request from a company CEO. Jana had reached out to get approval for data analytics software, and before approval, they wanted a specific metric, CLV.
This was a small company where the majority of customers started on a freemium plan. The company tech stack made it tough to get accurate numbers for free to paid plan conversion, payment tiers, and plan retention.
Jana got approval for the software, but it wasn't able to give them the numbers they needed to calculate a reliable CLV for the business. It turns out calculating CLV wasn’t a priority when the business started and there were limited resources to update systems to collect this information. So, Jana’s team was unable to calculate customer lifetime value when they needed it to guide their strategy. In the end, figuring out an accurate CLV took months of manual data collection and analysis.
But using this free customer service metrics calculator, you have clear formulas to help find the data you need and calculate LTV for your business. Keep reading, or jump to the formula(s) you're looking for below:
- How to Calculate Customer LTV
- Average Purchase Value
- Average Purchase Frequency Rate
- Customer Value
- Average Customer Lifespan
How to Calculate Customer LTV
Customer Lifetime Value = (Customer Value * Average Customer Lifespan). To find CLTV, calculate the average purchase value x average number of purchases = customer value. Once you calculate the average customer lifespan, you can multiply that by customer value to determine customer lifetime value.
You can see both formulas below:
Customer Value = Average Purchase Value x Average Number of Purchases
Customer Lifetime Value = Customer Value x Average Customer Lifespan
Customer Lifetime Value Metrics
There are many different ways to approach the lifetime value calculation. Keep reading to get an understanding of the most common CLV values. Then, analyze the variables that contribute to each to better serve your business needs.
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Average Purchase Value
To calculate average purchase value:
Divide your company's total revenue in a period (usually one year) by the number of purchases throughout that same period.
Average purchase value helps you see the average amount of revenue each customer generates during a period. Analyzing this number also shows you:
- Opportunities to increase the value of each transaction
- New options for cross-selling and upselling
- Whether your pricing and packaging strategies are working
This data helps you find new and viable products or services and other strategies to increase value per transaction and revenue.
Average Purchase Value Challenges
Challenges that come up while calculating average purchase value include:
- Getting accurate and comprehensive data on individual customer transactions
- Inconsistent data across multiple channels or platforms
- Seasonal fluctuations in customer spending behavior
- Inconsistent purchasing patterns
- Variable customer segments or groups can skew data
Tips for Calculating Average Purchase Value
To solve for these common problems:
- Use a reliable CRM system that combines customer transaction data from different sources
- Set up automated data collection for consistent transaction data
- Regularly audit and clean up data to remove duplicates and errors
- Integrate channels and platforms for a centralized view of customer transactions
- Analyze customer spending behavior over different seasons and adjust accordingly
- Review segment criteria to make sure customer groups are accurate
- Assign priority to different customer segments
Average Purchase Frequency Rate
To calculate average purchase frequency rate:
Divide the number of purchases by the number of unique customers who made purchases during that period.
Recent research says that a 5% customer retention increase can create a 25%+ increase in profit.
Average Purchase Frequency Rate is essential for calculating CLV because it shows you how often customers make repeat purchases. This metric also offers insights into:
- Customer engagement and loyalty
- Trends in customer behavior over time
- Churn reduction
- Future revenue streams
Average Purchase Frequency Rate Challenges
Like average purchase value, inconsistent or incomplete data can also distort your purchase rate numbers.
Other challenges include:
- Purchase cycle timing, which can get skewed by industry trends or product releases
- Changing customer buying patterns
- Seasonality
Tips for Calculating Average Purchase Frequency Rate
- Track and analyze customer data to capture changing customer buying patterns
- Regularly review and update customer segmentation based on buying patterns
- Offer personalized promotions to inspire more consistent spending
- Conduct customer surveys or interviews for insights into reasons behind changing purchase patterns
Customer Value
To calculate customer value, figure out the average purchase value for your products. Then, calculate the average number of purchases per customer (also called purchase frequency rate). When you multiply these two figures, it will give you the customer value.
Customer value is important in calculating CLV because it makes it easier to find the customers who have the most impact on your revenue. This leads to better strategies, because you can make more effective decisions when you know what each customer is bringing to your business.
Customer value is also important because it gives you what you need to segment customers by their purchasing habits. Segment insights help you create more targeted, customized experiences for your top customers.
Customer Value Challenges
- Data sources must be reliable, properly integrated, and accurately reflect the monetary value of each customer
- Estimating customer lifespan can be difficult as many businesses have a wide range of customer retention rates.
- Factors such as brand loyalty and referrals can be difficult to calculate. So, you may need extra qualitative and quantitative data to calculate customer value.
Tips for Calculating Customer Value
- Implement a CRM to confirm data accuracy
- Create a consistent process for assigning monetary value to each customer based on their transaction history
- Combine financial systems with customer data to show the monetary value of each customer, like these finance integrations
- Watch customer feedback and sentiment through reviews and social listening to add it to customer value calculations
Average Customer Lifespan
To calculate average customer lifespan:
First, figure out the average number of years a customer stays active with your company. Once you have your customer lifespan, you'll divide that by your total customer base to get the average.
You'll need excellent data management for this figure, and make sure you don't have duplicate accounts in your data.
Average customer lifespan is useful when calculating CLV. This is because it supports predictions on how long customer relationships will last with data. This helps you make more informed budgeting and resourcing decisions.
It can also help you:
- Launch proactive strategies to build customer relationships and reduce churn
- Figure out the ROI for customer acquisition
- Optimize marketing strategies
- Find acquisition channels with higher CLV potential
Average Customer Lifespan Challenges
Calculating average customer lifespan can be tough because:
- Accurate customer lifecycle tracking needs a robust data management system
- Different customer segments and subgroups can skew lifespan predictions
- Limited customer data or short relationships lead to projections that don't align with actual customer behavior
Tips for Calculating Average Customer Lifespan
- Use reliable customer service software to track the customer lifecycle
- Include data from different sources and platforms to create a full view of the customer journey
- Capture and analyze data at each stage of the buyer journey to track engagement and retention
- Analyze the average lifespan of each customer segment individually to limit skewed results
- Conduct regular trend analysis to predict shifts or changes that may impact lifespan
- Gather data on customer satisfaction and loyalty
- Constantly confirm and adjust lifespan average based on actual customer behavior and feedback
Customer Acquisition Cost
Customer acquisition cost is not a factor in most CLV formulas, but it can be useful to include in a customer lifetime value analysis.
Comparing how much it costs to acquire a customer with their lifetime value to the business, you can figure out how to:
- Decide how effective marketing and sales strategies are
- Distribute resources wisely
- Find fitting opportunities to improve customer retention and acquisition
Check out this guide to learn more about customer acquisition cost (CAC) and how to calculate. Then, review these tips for analyzing your CAC to LTV ratio.
Customer Lifetime Value Example
Using data from a Kissmetrics report, we can take Starbucks as an example for determining CLTV.
Its report measures the weekly purchasing habits of five customers, then averages their total values together.
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By following the steps listed above, we can use this information to calculate the average lifetime value of a Starbucks customer.
1. Calculate the average purchase value.
First, we need to measure average purchase value.
According to Kissmetrics, the average Starbucks customer spends about $5.90 each visit. We can calculate this by averaging the money spent by a customer in each visit during the week.
For example, if I went to Starbucks three times and spent nine dollars total, my average purchase value would be three dollars.
Once we calculate the average purchase value for one customer, we can repeat the process for the other five.
After that, add each average together, divide that value by the number of customers surveyed (five) to get the average purchase value.
2. Calculate the average purchase frequency rate.
The next step to calculating CLTV is to measure the average purchase frequency rate.
In the case of Starbucks, we need to know how many visits the average customer makes to one of its locations within a week.
The average observed across the five customers in the report was found to be 4.2 visits. This makes our average purchase frequency rate 4.2.
3. Calculate the average customer's value.
Now that we know what the average customer spends and how many times they visit in a week, we can determine their customer value.
To do this, we have to look at all five customers individually and then multiply their average purchase value by their average purchase frequency rate. This lets us know how much revenue the customer is worth to Starbucks within a week.
Once we repeat this calculation for all five customers, we average their values to get the average customer's value of $24.30.
4. Calculate the average customer's lifetime span.
While it's not explicitly stated how Kissmetrics measured Starbucks' average customer lifetime span, it does list this value as 20 years.
If we were to calculate Starbucks' average customer lifespan, we would have to look at the number of years each customer frequented Starbucks. Then we could average the values together to get 20 years.
If you don't have 20 years to wait and verify that, one way to estimate customer lifespan is to divide 1 by your churn rate percentage.
5. Calculate your customer's lifetime value.
Once we have determined the average customer value and the average customer lifespan, we can use this data to calculate CLTV.
In this case, we first need to multiply the average customer value by 52. Since we measured customers on their weekly habits, we need to multiply their customer value by 52 to reflect an annual average.
After that, multiply this number by the customer lifespan value (20) to get CLTV.
For Starbucks customers, that value turns out to be $25,272 (52 x 24.30 x 20= 25,272).
Tips to Increase Customer LTV
Now that you know your customer lifetime value, how do you increase it?
Here are some strategies that I know can help.
1. Optimize your onboarding process.
Customer onboarding is the process of bringing your customers up to speed with your brand — what you do, why it matters, and why they should stick around.
Onboarding happens in the first few days after customers make their first purchase.
When they head back to your website to look at other items or connect with you by email, they're learning how your company works and what you can offer.
The result? You need to stand out while making this straightforward. To make the most of your onboarding process:
Use customer data to personalize onboarding.
Offer curated item selections or great deals, and then follow up with email contacts to make sure what they've already bought lives up to expectations.
As you scale it can become more difficult to personalize. But with tools like HubSpot Service Hub, you can create personalized onboarding workflows to guide customers through the necessary steps. This custom experience can help them quickly understand your product or service and get value from it quickly.
Streamline onboarding with useful tools.
Use a knowledge base or live chat to help simplify onboarding. These features help customers easily find information and get quick support whenever they need it.
Collect customer feedback through surveys.
Connect after onboarding to get insights on their onboarding experience and find areas you can improve the customer experience with feedback.
Track key onboarding KPIs.
Collect and analyze service metrics such as customer activation rate, time to first interaction, customer retention rate, and repeat purchase rate. This data can help you enhance your onboarding process for increased CLV.
Why This Works: Optimized onboarding processes work because they establish a framework for long-term customer relationships that help increase CLV over time.
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2. Increase your average order value.
One of the smartest ways to improve your CLV is to increase your average order value.
When a customer is about to check out, you can offer relevant complementary products to those they're about to buy.
Get inspired by these upsell and cross-sell examples.
Brands like Amazon and McDonald's are examples of companies that use upsell and cross-sell methods extremely well.
Amazon will offer you related products and bundle them into a group price as depicted below.
McDonald's, meanwhile, offers small add-ons — such as those delicious apple pies — that help boost overall CLV.
Offer tiered pricing and other pricing choices.
Give new and current customers different product packages or service levels to choose from. This encourages customers to upgrade or opt for higher-priced options.
For example, if you're a subscription-based company, you can increase your average order and customer lifetime value by encouraging your customers to switch to an annual billing cycle.
Create bundled pricing packages.
Combine complementary products and offer them at a discounted price. This not only inspires customers to buy more items, it also increases their order value.
Create targeted promotions to increase order value.
Offer personalized discounts or incentives to specific customer groups. For example, you might encourage high-value or returning customers to make larger purchases with a targeted discount.
Don't forget to track customer retention rates and repeat purchase rates alongside CLV. This will help you connect the results of these strategies to long-term customer value.
Why This Works: This works because even a small increase in order value over time leads to increased CLV and overall revenue.
Consider the example of the McDonald's apple pie. While adding a $1(ish) item to each transaction isn't much on its own, over time these smaller amounts add up to substantive revenue and help increase total CLV.
3. Build long-lasting relationships.
Long-term customer relationships are based on trust.
If buyers believe that your company offers them the best prices on the products and services they want, they'll come back. But this is just the beginning.
With social media now a critical part of any branding and marketing efforts, customers want more than just a business-based relationship.
They want to cultivate a personal connection that makes them feel like more than simply a road to better business ROI.
Send personalized outreach.
It's critical to engage with customers on your social media accounts with more than just canned advertising posts.
For example, you could do some social sleuthing to discover more about your customers. Then, send them a (small) free gift that aligns with their interests.
Respond to customer comments and messages.
Reply to mentions, messages, comments, and more. This shows that you value input and are hoping to have meaningful conversations with your customers.
A ticketing system isn't just helpful for customer problem-solving. It can help you provide prompt and consistent support and engagement where your customers are. This is critical for building trust and mutual satisfaction.
Share authentic and relatable content.
Get genuine and go beyond canned advertising posts. Tell stories, share behind-the-scenes moments, and encourage user-generated content to build community.
Host interactive events or challenges.
You may not be able to connect with every customer in person. But you can encourage active participation and build connections with online events. This guide to running virtual events can help you get started.
Why This Works: This works because you need to stand out from the crowd. Quick and easy eCommerce is now par for the course — if you can forge an actual connection with customers you'll keep them coming back and increase your total CLV.
4. Embrace good advice.
Sometimes it's better to listen than talk.
Customers often have good advice on how you could improve business practices to better serve their needs — and you can increase CLV by taking it.
To make the most of advice from your customers:
Analyze and rank customer suggestions.
For example, you could create a poll on new product or service ideas and see what your customer base thinks. Make sure you don't lock them into a specific set of choices. Instead, give them room to add their own ideas that could help make things better.
And don't stop at surveys. You can collect reviews, social media, and customer support interactions too. Then, review this feedback for common themes and to prioritize what you want to improve.
HubSpot's customer feedback tools make it easy to seek input and suggestions from your customers. While not every customer will engage, those who do will often have good advice and can end up being some of your most loyal customers.
Loop in relevant stakeholders for decision-making processes.
Bring in stakeholders from different departments to review, discuss, and evaluate customer feedback. Not every suggestion will be realistic for your business. But the more you can honor the needs of your customers, the more likely you are to boost CLV.
Service Hub's collaboration and team management features streamline knowledge sharing. This encourages internal collaboration.
Communicate changes you've made based on customer advice.
Give credit where credit is due. If a customer comes up with a good idea, credit them for the help. You may also want to consider sending them something as a token of appreciation.
Why This Works: This works because it shows you're willing to listen. Too many brands take the stance that they know what their customers want better than customers themselves, which in turn can lower total CLV.
5. Empower easy connections.
Customers won't wait around for your brand to connect with them or answer their questions. 2023 HubSpot data says that 66% of consumers want a response to emails from customer service in five minutes or less.
While this isn't always possible, businesses can put practices in place to shorten response times and empower easy connections.
Use technology such as chatbots or automated support systems.
When you can, offer instant responses to common customer queries. Tools like live chat, chatbots, and email integrations can help streamline the connection process. They can also offer immediate assistance to meet high customer expectations.
Create self-service resources and knowledge bases.
Make it simple for customers to find answers to their questions independently. You can accomplish this with a knowledge base, customer portal, and other self-serve resources. This empowers them to find information quickly. It also reduces the need for direct interactions while creating a connection.
Be proactive on customer feedback channels.
Equip your customer success team with tools and technology to monitor and respond to customer comments or concerns through different channels, such as social media and online reviews. This can help your brand jumpstart the connection process.
Why This Works: CLV is now driven by relationships and relationships require an ongoing connection.
While five-minute email response times may be out of reach, the easier you make it for customers to connect with your brand the more connected they'll feel overall.
And the more likely they'll come back to spend more money.
6. Improve your customer service.
According to 2023 HubSpot research, 93% of customers are likely to make repeat purchases with companies that offer excellent customer service.
So if you want to improve your customer lifetime value, you should pay attention to your customer service and look for ways to make it excellent.
Here are just a few ways you can improve your customer service:
Use omni-channel customer support.
Make sure your customer support experience is seamless and consistent. To do this, offer support across multiple channels, such as phone, email, live chat, and social media platforms. This makes it easy for customers to reach out through their preferred channel.
HubSpot's service automation features can help you automate support tasks. When you reduce manual outreach, like routine emails, it gives you more time to focus on resolving complex issues. This can help your team offer higher-quality service to your customers.
Add personalized services.
Use customer data insights to personalize the experience for each customer. This information can help your team make custom recommendations, offers, and product suggestions.
Offer a proper return and refund policy.
Create a clear and fair return or refund policy that shows your commitment to customer satisfaction. Keep in mind, any great refund or return process should be hassle-free.
Enhance customer service training.
Make sure your business has a training program in place. Great service training should educate employees on your products, best practices, and problem-solving. Training should also include active listening, empathy, and effective communication techniques.
Add customer service feedback systems.
Sending customer surveys is a great idea, but it won't help much if you don't have a process in place to analyze your data. Create processes to review customer feedback regularly. This can help you notice patterns or trends and address any recurring issues.
Why This Works: It's simple: The better your customer service the more customers feel valued by your brand for more than their purchases.
If you stand behind your products with substantive return and refund policies, it communicates to customers that your priority is quality and satisfaction, not overall sales volume.
The result? Increased CLV.
The Benefit of Customer Lifetime Value
Customer lifetime value is an incredibly useful metric. Once you know how to calculate lifetime value, you'll know which customers spend the most at your business and which ones will remain loyal to you for the longest amount of time.
Use the formulas and model provided above and start calculating CLTV for your business today.
Editor's note: This post was originally published in May 2021 and has been updated for comprehensiveness.
Free Customer Lifetime Value Calculator
Calculate your business's key metrics and KPIs for customer support, service, and success with this free template.
- Customer Acquisition Cost
- Customer Lifetime Value
- Customer Satisfaction Score
- And More!
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