Customer lifetime value (LTV) is an important metric to determine the revenue you can expect to make from a customer over the length of the customer’s entire relationship with your brand. Calculating LTV can help you understand who your most valuable customers are, so you can prioritize keeping them. The more business they bring, and the longer they stay loyal to your brand, the more you can increase LTV.
A customer is more than just a single sale. Turning a one-time shopper into a return buyer and boosting the value of each transaction is all part of increasing LTV—and it’s great for your bottom line. The key to making that happen is identifying your most valuable customers and ensuring you provide them with the best possible customer experience, to keep them coming back and spending more for a long, long time.
Why is Customer Lifetime Value Useful?
The cost of acquiring a new customer is higher than the cost of keeping one. Calculating LTV is a good way to see whether you are getting a return on your investments in customer acquisition—like what you’re spending on advertising, marketing, and special offers.
This allows you to allocate resources toward acquiring and retaining high-value customers. For instance, you may choose to dedicate an account manager for these clients (even if it’s just in the couple of months before their subscription runs out). LTV can also show you the best prospects to target with add-ons and upsells to increase their per-purchase revenue.
LTV can be a useful measure to predict your company’s growth potential and decide whether raising or lowering prices is sustainable. If lifetime customer value doesn’t exceed what you’re spending per customer, you might have to change your business model or pricing structure to sustain or expand. On the flip side, if LTV is significant, you may have the wiggle room to lower prices without hurting growth.
How Do You Calculate LTV?
There are different ways to calculate customer lifetime value— it can be based on your business model, order volume, or frequency of customer purchases.
For average customer lifetime value, you first need to figure out what your average customer spends per purchase. Multiply that by the average purchase frequency. Then multiply that by the average customer lifetime, or how long the average customer remains a client.
For instance, if you run a coffee shop, your average customer might buy a cup of coffee ($3) four days a week, 50 weeks a year, and keep coming in for five years. Your average LTV calculation would look like this:
LTV = $3 x (4 purchases/week x 50 weeks/year) x 5 years = $3,000
Segmenting customers into groups (like those who buy more expensive products, versus those who stick to basic offerings), or looking at individual user behavior, can give you more detailed information to allow you to target clients who create higher profit margins.
If your business runs on a subscription model, a simple way to calculate LTV for new customers is to use the churn rate, or how many customers you expect to lose in a subscription period. In that case you use the subscription price divided by churn rate:
LTV = money spent per customer / churn rate
How to Improve LTV
Customer lifetime value can tell you a lot about your business and inform you how to nurture your highest-value contacts and boost their value.
Here are some ways to increase customer lifetime value:
- Invest in customer experience. Customer relationships are key to boosting LTV. From the moment a customer makes a purchase or inquiry, every part of their experience with your brand can affect the likelihood they’ll come back. The more they come back, the higher their value.
- Prioritize high-value acquisitions. It doesn’t make sense to spend more money on acquiring new customers that don’t return to you in the form of sales. By isolating high value customers, you can focus retention efforts on those who consistently buy.
- Create a loyalty program. Loyalty programs boost customer retention. Consider offerings such as frequent buyer points, perks like free shipping and early access to sales, or special promotions for program participants.
- Improve ordering, returns, and customer service. Every touchpoint is an opportunity to impress a customer or lose a customer. When orders and returns are frictionless experiences, customers are more likely to buy again. Use customer service best practices to answer all complaints and issues promptly, fostering a positive long-term relationship.
How to Take Your LTV to the Next Level
Perhaps the most important action you can take to improve customer lifetime value is to integrate that data with your cross-channel marketing strategy. Cross-channel marketing takes data, such as customer interactions, and then personalizes the customer journey to each individual consumer. This automation allows for targeted campaigns to be sent on the platform and device that’s most likely to reach that particular customer.
Cross-channel marketing is the perfect way to increase the lifetime value of your customers. By prioritizing each customer’s unique interests and communication preferences, you can send messages, promotions, and upselling opportunities that are custom-designed to re-engage them and encourage them to make additional purchases. By making each customer relationship a priority, your customers will reward you with their brand loyalty.
To learn how Iterable can help you build a cross-channel experience to increase LTV, schedule a demo today.
