NEW! Listen to article
Your key metrics—or key performance indicators (KPIs)—are there to tell you how well you’re meeting your customers’ expectations and gaining conversions.
One of the most important metrics to measure is customer lifetime value (CLV).
What Is Customer Value?
Customer lifetime value can be described as the total profit that a company can expect to generate from a customer throughout the business relationship with that customer.
CLV might comprise revenue from customer purchases of…
- Products or services
- Product add-ons and after-sales care
- Warranties
- Subscriptions
Of course, that’s not a comprehensive list.
Why Does CLV matter?
Focusing on the entire customer lifetime, and not just individual sales, is a great way to boost stable sales numbers and business income.
However, customer value is equally important as a metric for your marketing and sales campaigns. Working out CLV can show you which demographic of customers is likely to contribute the most value to your business throughout the customer lifecycle.
By focusing your marketing efforts and sales campaigns on those segments of your audience, you’ll likely achieve a higher ROI.
CLV in B2B
Customers are the bread and butter of any business, so it’s always essential to keep them happy. But for B2B companies, nurturing your relationship with each individual customer is particularly crucial.
By its nature, B2B sales cycles require a longer, more complex process to move customers through the funnel. Businesses have more specific needs and a higher spend, so they will naturally need more convincing than individual consumers. From initial outreach and pitching to ongoing support, each stage requires a customized, personalized approach built on trust and integrity.
Done well, that approach often pays off, leading to increased loyalty; and considering that existing customers are likely to spend 67% more on average than new customers, that loyalty can lead to more sales. But it’s not always so straightforward—once you’ve secured a new client, maintaining the relationship takes considerable time and effort, too.
Imagine losing a customer when your initial contract ends after draining all of those resources? Knowing that acquiring new customers is significantly more costly than generating business from existing ones, increasing customer retention becomes crucial.
But it’s one thing to simply retain customers. To truly capitalize on each client, you must increase their CLV. Tracking this metric allows you to identify the highest-value customers you may want to dedicate more time to. And you can see what may be stopping low-value customers from using your services or buying more.
Understanding CLV in Marketing
Let’s say you’ve secured a new client in the nonprofit sector. Initially, the organization has a low marketing budget (as many charities do), and it employs your services for a new website. The three-month contract, valued at $10,000, will result in fresh copy for the new site, overseeing of the launch campaign, and creation of five new blog posts.
Throughout the campaign, you conduct regular meetings with the team, gather consistent feedback to fine-tune your efforts over the three months, and create KPI reports for the launch campaign.
That regular communication and commitment pays off: when the contract ends, the company extends for another six months, expanding the scope of your services to include social media marketing and digital advertising. Suddenly, that $10,000 has more than doubled. More important: you’ve created a loyal customer who believes in your capabilities enough to give you new business.
How to Calculate Customer Value
Calculating customer lifetime value is simple. Use the following formula to calculate CLV:
Customer Value = average value of a purchase ($) x number of times the customer will buy each year x average length of the customer lifecycle (years)
What customer value shows you is one way of determining which customers are most important to the success of your brand.
For example, a small software development business that supports a range of clients might see one customer, Brand A, with a customer value as follows:
- A monthly retainer for rudimentary website updates of $4,000
- Support on data management, for example with a Delta Lake guide, of $500
- A project management fee of $300
All costs are paid monthly, with a lifecycle of 5 years.
CLV = 4,800 x 12 x 5
CLV = 288,000
Brand B, on the other hand, has worked with this company since its inception and has built a strong relationship as it has grown. As well as a US site, it now uses a UK domain and engages in e-commerce business. Its costs look like this:
- A monthly retainer for complex website updates: $9,000
- Data management support, implementation of new coding development: $3,000
- Project management fees: $1,000
- Customer-focused, responsive development on demand: a retainer of $5,000
- Support with plugins and e-commerce features: $2,000
Because of their collaborative relationship, the customer lifecycle here is much longer, at least 20 years:
CLV = 20,000 x 12 x 20
CLV = 4,800,000
Clearly, Brand B has a far higher customer lifetime value than Brand A.
This calculation should work for you with every customer in your business. In some industries, however, it’s easier to understand and calculate than in others.
You will have to employ some estimations—the duration of a customer’s engagement with your business, for example. Be realistic with that figure, considering the following:
- The need that customers have for your products
- External factors that may affect sales, such as economic factors
- Competitor products and developments
- Customer personas and their different levels of want and need for your products or services
As in the above example, building quality relationships with brands and customers likely to be interested in future developments should drive up your customer lifetime value.
Whereas Brand A may choose to outsource certain aspects of their technical presence, like data processing and handling, Brand B, with a close relationship with the agency, may choose to expand the relationship and request support for data processing work—for example, with training on PySpark and its uses.
Ultimately, customer value is about deciding where to allocate your resources to maximize return on investment and positive customer relationships.
How to Increase Customer Value
So, what can you do to increase customer value at your company? That depends on who your customers are, but in essence it’s all about increasing the value of your customers by increasing the value that your products and services provide.
Run customer surveys
The simplest way to find out how you can be more valuable to customers is to just ask them.
The response rate for surveys is quite low. Some online survey platforms report rates of 6-16% for their users. But 16% of a large customer base is still a lot of good feedback. If you find out about a customer pain point here and fix it, even a 1% increase in CLV adds up to a lot of revenue.
Find your most valuable customers
A more indirect and potentially more revealing approach is to closely watch data and analytics. Watching customers’ on-site behavior or buying habits, and combining that with demographic information, can help you break them up into segments or personas.
From there, you can figure out what your most valuable customers have in common. Maybe they tend to be in one age range, or they tend to have similar kinds of jobs.
From there, you can increase your average customer value by focusing more of your marketing on people who “look like” your most valuable customers already. That brings up your average CLV, as well as boosting your marketing ROI in the process.
Talk to customers directly
If you’re a B2B company, you’ll know that customers are much more willing to get on a call about the product.
Companies like Stripe don’t just have a customer success team talking to their most valuable customers, they encourage all staff to talk to customers through online surveys, on calls, or in their annual Stripe Sessions conferences. CEO Patrick Collison has at times tweeted to ask customers for the one improvement they’d most like to see in Stripe’s products.
A B2B company will usually have a handful of “key accounts,” the most valuable customers who bring in most of the revenue. It’s necessary to keep them always happy, so it’s always worth someone’s time to get on a call with them.
But by talking to the most valuable 50% of your customers, not just the top 10%, you can find ways to make the product worth a higher spend for them. That way, you achieve two things: You increase average CLV by turning more accounts into key accounts, and you make your product more attractive to new leads who resemble the upper 50% of your existing customers.
Set up a loyalty program
For B2C companies, loyalty programs are becoming increasingly popular. That might involve rewarding customers with points they can trade in for discounts or points they can earn to unlock more exclusive, premium benefits.
If people are already buying some products from a store, a loyalty program incentivizes them to do one of two things: Either they buy more of the same products they were buying already, or they buy new products they were previously buying from competitors. In either case, the value of that customer increases.
Loyalty programs also give you access to zero-party data: any information that the customer is happy to share with you. As you find out what your most loyal customers have in common and what makes them happy, you can use that information to create a more valuable service for the rest of your customers. That, in turn, will make them more loyal, more likely to recommend your service, and more valuable to your business.
* * *
Knowing how to calculate customer value is important because it shows the efficacy of your customer retention strategy. It can also indicate issues with your products as well as help to identify areas where you can add value for your customers.
Avoid entirely neglecting customers with a low customer value—although it’s perfectly fine to direct more resources to demographics with a higher CLV—and instead use the opportunity to identify points that you haven’t yet addressed and build relationships with low-CLV customers.
More Resources on KPIs and Customer Lifetime Value
The Top 5 KPIs Marketers Need to Measure (And How to Measure and Improve Them)
Content Marketing and Customer Acquisition: How to Calculate Your CAC, CLV, and ROI
Do You Know Who Your Most Profitable Customers Are?
Senior Marketer Survey: Top Customer Lifetime Value Challenges and Solutions
