What is customer lifetime value?
Customer lifetime value is a metric that considers the amount of money a customer would spend with a business in a lifetime. It includes product purchases, service charges, subscription costs and complementary add-ons.
In simple terms, it is the amount of money a customer is expected to spend during their business relationship. It is an essential metric for organizations as it helps them make critical customer acquisition and retention decisions.
Why is customer lifetime value important to your business?
High CLV strongly indicates brand loyalty, customer satisfaction and recurring revenue. Calculating the CLV for different customers gives you clarity on many questions like:
How much should you spend to acquire similar customers?
How much time would it take the lead to buy from you and become a customer?
Which products have the most sales?
Which customer segments drive the maximum sales?
Why do your most loyal customers buy from you?
When you ask these questions and get a clear answer to them, you reap two significant benefits:
1. A better customer acquisition strategy: When you know the CLV of your customers, you get a clear understanding of what to spend on customer acquisition. If acquiring a new customer requires more spending on marketing, but their CLV is low, you can redirect your resources into expanding your target base.
2. A better customer retention strategy: Why are your customers loyal to you? What makes them stick with you? And how do you ensure they stay loyal to you? Knowing the CLV of your customers helps you devise better strategies for retaining your existing customers.
How much are your customers costing you?
The cost of a customer is the total of the following expenses:
Customer service costs
Cost of goods and services sold
When you add these five factors, you understand how much your customers are costing you. Compare this cost to the customer's revenue to calculate the return on investment.
Assessing the cost of acquiring and servicing customers with their lifetime value ensures your acquisition strategies are sustainable and profitable.
How do you measure customer lifetime value?
There are different ways to measure customer lifetime value (CLV), but the most common method is to use the following formula:
CLV = (Customer revenue per year * Number of years customer remains active) - Cost of acquiring and serving the customer
To calculate the CLV using this formula, you would need to determine three essential components:
1. Customer revenue per year: The average revenue a customer generates for your business in a year. To calculate this, divide the total revenue a customer generates by the years they have been active.
2. Number of years a customer remains active: The expected length of the customer relationship. To calculate this, use stats or refer to industry benchmarks.
3. Cost of acquiring and serving the customer: It includes costs associated with acquiring and servicing the customer, such as marketing and advertising expenses, sales commissions, customer service costs, and the cost of goods sold.
Once you have these three components, you can calculate the CLV using the formula above. It's important to note that this simplified formula may only account for some of the variables contributing to CLV. Depending on the business, other factors such as customer churn rate, referral rate, and customer loyalty may also need to be considered.
It's also worth noting that CLV is not a static metric and can change over time as customer behavior and market conditions evolve. Regularly reviewing and updating CLV estimates can help businesses make more accurate and informed decisions about customer acquisition and retention strategies.
How to improve CLV?
Customer lifetime value is directly proportional to customer experience. You can improve your CLV with these five points.
1. Exceptional customer service: Customers feel valued knowing you care for them. Excellent customer service helps you create positive experiences and increases the probability of repeat purchases.
2. Personalized customer experience: Create a deeper connection with your customers so that they stay loyal to you. Send them customized offers, target them with relevant ads and get better at communicating with them using data.
3. Offer loyalty programs: Incentivize your customers when they remain loyal. Come up with rewards like discounts, exclusive offers and special access through loyalty programs.
4. Cross-sell and upsell: As you know your customer’s journey better, find ways to make it easier and better by finding upsell and cross-sell opportunities. You increase your customer lifetime value when you find the right complementary products for your customers.
5. Timely communication: Regularly update your customers and make them feel connected. Leverage social media, and send them newsletters and goodies regularly,
When you use these five strategies, you increase customer loyalty, spending, and eventually, the lifetime value of your customer base.
Give exceptional customer service with Sprinklr
Outstanding customer service is one of the best ways to increase CLV. Built on the only unified customer experience management (Unified-CXM) platform, Sprinklr Service is the first purpose-built Contact Center as a Service (CCaas) to make better customer service more effortless for you with these features:
When your customers are spread across multiple channels, be omnipresent. Listen and engage with your customers across 30+ digital and traditional channels.
Answer their queries, resolve their problems and craft better experiences for them.
Increase your CLV
Increase your revenue by leveraging the purchase intent of your customers. Route such messages to the right team and ensure your marketing, service and sales team reach the right customers at the right time.
Prioritize your customers
Use Sprinklr’s AI-powered Rule Engine to classify and prioritize messages based on keywords, issue type and sentiment.
With automated workflows, agents can engage and re-engage at multiple points with customers in their journey. You can turn routine queries into guided workflows for agents, which would help them resolve cases quickly.
Customer lifetime value FAQs
Question 1: What is the difference between CLV and LTV?
Answer 1: CLV (Customer Lifetime Value) and LTV (Lifetime Value) are related business terms but are not the same thing.
CLV is the total amount of money a customer will spend on a company's products or services throughout their lifetime as a customer. It accounts for the customer's purchase history and the likelihood of future purchases.
LTV is the total revenue a customer will generate for a company over their entire lifetime. It includes the money the customer will spend on the company's products or services and any referrals or recommendations they may make, resulting in new customers.
Question 2: Is customer lifetime value a KPI?
Answer 2: Yes, customer lifetime value (CLV) is a key performance indicator. It helps businesses understand the long-term value of their customers in terms of the revenue they can expect to generate from them throughout their relationship with the company.
Changes in CLV over time help you gain insights into how effective your customer acquisition and retention strategies are and what could be done to improve them.
Question 3: What are the three components of CLV?
Answer 3: The three components of customer lifetime value (CLV) are:
1. Customer value:The total revenue a customer is expected to generate for the company over a lifetime.
2. Cost of customer acquisition: The total cost of acquiring a customer, including marketing expenses, sales commissions, and other costs.
3. Customer lifespan: The time a customer is expected to remain with the company.
By calculating these three components of CLV, a company can better understand its customers' long-term value and make better strategic decisions on customer acquisition, retention and overall business growth.
Try Sprinklr Service today for free and see your CLV go up!
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