Understanding your customers' lifetime value (CLV) is essential to running a successful business (whether it's in the US or Europe). That's why we will discuss the benefits of calculating CLV as well as the importance of segmenting your customers (perhaps age, gender, employment, etc.). We will also provide you with some 🔥 tips on how to improve CLV.
The Importance of Customer Segmentation
Customer segmentation is essential for understanding CLV (LTV). Scott Davis, By segmenting customers into different groups, you can get valuable information about their behavior on the website and product preferences (product types). If you segment customers by age, you can see which age groups are more likely to buy from you (e.g. online store, shoes or clothes) and which are less likely to buy from you. This data will help you create targeted marketing campaigns, especially for email campaigns. In addition, customer segmentation can help you identify opportunities for customer retention (unless there are repeat purchases). For example, if you segment customers by frequency of purchases, you can see which customers are more likely to churn (Churn Rate) and which customers are more likely to remain loyal 🤗 (based on NPS). Taking this information into account can help you develop strategies to retain customers and reduce churn. Finally, customer segmentation can help you identify new customer segments that you could target. By understanding the behavior and preferences of different segments, you can create customized campaigns to attract new customers and increase your overall customer base.
What is Customer Lifetime Value?
This is a vital parameter that shows the objective benefits brought after cooperation with a specific client. Such a parameter is similar to others, such as:
- Cost for acquiring customers: this is the price the brand pays for acquiring its audience.
- Retention factor: this parameter represents the percentage of people who cooperate with a company for a specific period of time and aren’t lost after several interactions.
- Cost to serve: this shows how much it costs to serve one person while considering all of their inquiries and satisfying them.
A CLV calculator is necessary throughout the entire brand’s lifetime to help understand the primary benefit of each client and properly determine the budget for digital marketing or ads services.
Why is Customer Lifetime Value Important?
Using the customer lifetime value calculator provides significant opportunities to improve company functions and optimize specific services. The main advantages are:
- Measurement of objective profit from marketing campaigns and the ability to determine the most effective methods of attraction (based on Google Analytics, Mixpanel, Plerdy or other analytics data).
- Understanding effective ways to implement additional business functions (what the client would like).
- Getting more target customers by improving advertising campaigns (Facebook, Google Display, Google Context Ads, Remarketing) and achieving better brand authority.
- The defining long-term business aims to get a positive vision of the company structure in the future.
- Optimizing the end result attracts the target audience and keeps the old one associated with the brand.
When using the CLV calculator, it is always important to determine the primary goals, and what should be improved first.
Customer Lifetime Value (CLV) Formula
The CLV formula for calculators is easy, and the indicator can be counted manually. The critical aspect is that the tool makes it automatic and avoids possible counting mistakes. “CLV = Average money spent on operation * Number of purchases or transactions through a specific period * Time of the customer’s retention.” Each indicator in the calculator’s formula depends on the peculiarities of the company’s services and the type of its financial interactions. That’s why it’s crucial to consider different aspects when measuring the CLV with a calculator.
How to Calculate Customer Lifetime Value?
The marketers can analyze the specific business performance indicators and insert them into one of the following formulas:
Typical CLV: “CLV = Profit expected after a specific time of serving the client * Retention Coefficient/ (1 + Discount Indicator - Retention Coefficient).”
Predictive CLV: “CLV = Revenue for one customer per year * Time of the cooperation - Financial expenses for serving one client.”
CLV for Individuals: *the same as the previous one* helps establish long-term cooperation.
Each formula is essential for online business and measuring the parameters with the automatic CLV calculator simplifies the procedure.
Benefits of Calculating CLV
Calculating the value of each customer over their lifetime will provide you with valuable insights into their purchase behavior and loyalty. This data can help you identify customers more likely to purchase from you as well as churn. CLV can also help you understand the profitability of different customer segments, enabling you to focus your marketing efforts on the customers most valuable to you. CLV allows you to identify opportunities for customer retention. By understanding the value of each customer, you can develop strategies to keep them engaged and make sure they stick around for the long term. Additionally, you can get an idea of different marketing campaigns' potential returns on investment. This can help you allocate resources more effectively. Finally, calculating CLV can help you identify customer segments not serving your business. By understanding the value of each customer segment, you can create targeted campaigns to reach new customers and increase your total customer base.
Understanding the Components of CLV
The key components of customer lifetime value are customer acquisition cost (CAC), average order value (AOV), customer retention rate (CRR) and customer lifetime value (CL). CAC is the cost of acquiring a new customer, including advertising and marketing costs. AOV is the average amount of money a customer spends per order. CRR is the percentage of customers who return to make another purchase. Finally, CL is the average time a customer remains a customer of the company. All these components are related to each other and can help you understand the overall CLV of customers. For example, if your CAC is high and your AOV is low, it may indicate that you need to focus on the right customer segments or analyze Google Analytics data for insights. On the other hand, if your AOV is high and CRR is low, you need to do more to retain existing customers.
Tips for Improving CLV
There are several steps you can take to improve your customer lifetime value:
- Focus on customer retention: Develop marketing strategies to keep customers engaged and ensure they stick around for the long term.
- Improve the customer experience: Make sure customers have a positive experience interacting (UX data) with the website.
- Utilize customer segmentation: Segment your customers into different groups and create tailored campaigns to reach new customers and increase your total customer base (look for ideas for repeat purchases of goods).
- Offer rewards and discounts: Offer rewards and discounts to encourage customers to purchase more frequently (annual, monthly or discount, such as Christmas or Black Friday).
- Analyze customer data: Use customer data to gain insights into their purchase behavior and loyalty (conduct various surveys, such as CSAT, NPS or CES).
- Monitor CLV: Monitor your CLV regularly to identify trends and opportunities for improvement.
- Utilize a CLV calculator: Use a CLV calculator to quickly and accurately calculate the value of each customer over their lifetime.
Improve usability on the site and explore the behavior of potential customers. In this case, sales and CLV are more likely.
Conclusion about Customer Lifetime Value Calculator
Customer lifetime value is a powerful metric that can provide valuable information about existing and potential customers (leads). By calculating the lifetime value of each customer, you can gain valuable insights into customer buying behavior and loyalty. If you want to unlock the potential of customer lifetime value, try Plerdy to run popup surveys, increase micro and macro conversions, understand user behavior on the site pages, and find anomalies on the site.