Customer Lifetime Value: How to Calculate and Analyze LTV

It is pretty easy to be excited by how many products you’re selling. What you might not consider as often is how many of those product sales are repeat customers. How many of your customers buy from you again?

A lifetime value analysis can help you decide just how much your customers are worth to you. Don’t consider just the short term, but a lifetime of business together. Using a customer lifetime value formula can help you to shape your marketing to increase customer lifetime value.

What is customer lifetime value?

Customer lifetime value (CLV) or lifetime value (LTV) is an expected profit margin throughout a relationship with a customer. This profit takes into account the costs of attracting and keeping a customer. These include marketing expenses, operation costs, and the cost to produce the goods or services being sold.

It can be tempting to work for a single sale and not worry about lifetime sales. After all, monthly sales are a straightforward bottom line. However, failing to work towards understanding the value of and retaining existing customers is a mistake.

A customer’s value over a lifetime is monetarily much higher than achieving new sales from customers who don’t purchase again. A loyal customer who keeps buying from you through the years is more likely to recommend your business. They may pay more despite more affordable competitive products or services.

Is retaining customers important?

Your company is bound to gain and lose customers over its lifetime. Still, your goal should be to keep as many loyal customers as you possibly can. Keeping customers may not be as exciting as getting new ones.

Too many executives focus on marketing campaigns designed to draw in new customers rather than retaining current ones. Depending on your industry, it can cost from around $10 to nearly $400 to gain each new customer. It may cost as much as 5x and 25x more to get a new customer than keep an existing one.

Keeping customers may be much more affordable. The lifetime value of each customer makes it well worth your while to put effort into keeping them. Keeping only 5% more customers may increase your profits from around 25% to as much as 95%.

Simple customer lifetime value calculator

Length of relationship © X Sales per customer (B) X Sale vale (A) = Lifetime value of a customer.

A. sale value

B. average amount of sales per customer

C. length of the business relationship

The better your data, the more likely you will be to estimate an accurate lifetime value. Remember that this estimate doesn’t take into account any of the expenses involved in attracting a customer. It also doesn’t include the operating expenses of your business or online store.

If you estimate what percentage your profit margin is, you can determine your final LTV.

Say that you have a customer who usually spends around $100 per sale and shops twice a year for three years. To calculate the LTV before expenses, this would be your formula:

$100 X 2 X 3 = $600

To find out how much that customer is worth over their lifetime after expenses, simply multiply the total by your profit margin. This is determined by subtracting the costs of overhead, marketing, etc. If it was 30%, your formula would be

$600 X 30% = 180

Naturally, the amount that you spend will detract from your bottom line in customer value. Attracting a customer, maintaining your business, and producing your products all hurt your income. The more customers that you can keep, the less you’ll need to spend on marketing costs to attract new customers.

Factors that go into how to calculate the customer lifetime value

Understanding the data needed to calculate CLV can be a challenge. Collecting this information isn’t always straightforward. Sometimes understanding the results can be frustrating. Here are a few dynamics that are important to know when calculating LTV.

Churn rate

The churn rate, or rate of attrition, is determined by how often customers stop shopping with a business. This number will vary dramatically from business to business. Retailers who often have products go in and out of fashion may experience a higher churn rate. Businesses whose average customer barely thinks before making the same purchase, like necessity producers, will experience lower churn rates on average.

Some simple math is necessary to determine your churn rate:

Subtract the customers that you have at the end of the period from the customers you had at the beginning.

Divide that number by how many customers you had at the beginning of the period.

Beginning of period: 10,000 customers

End of period: 9500 customers

Churn rate: 10,000–9500 = 500

500 \ 10,000 = .05, or 5%.

That means your churn rate would be 5%. 5% of the customers who previously chose to patronize your business went somewhere else this period.

Customer loyalty

The loyalty of your existing customers will determine how likely they are to stay with you. Learning trends about the overall commitment of customers can also help you to understand what your brand is doing to shape loyalty in new customers. Businesses with high loyalty will tend to have much lower churn rates.

A loyal customer can organically increase customer numbers with word of mouth and social media marketing. The more dedicated your customers are, the higher customer retention is likely to be. This results in greater customer lifetime value.

How to increase the customer lifetime value

Whatever your current average customer lifetime value, you probably are looking for ways to increase it. After all, the CLV is directly related to your income and indirectly related to the success of your business.

Make a good first impression

If you want to begin inspiring loyalty to develop a lifelong customer, it’s a good idea to start at the beginning. Work on your impression from the first time that a customer interacts with your store until they are years into making repeat purchases. Throughout the experience, you want to encourage them to feel positively towards your brand.

Make sure that each customer understands the assets of your products as soon as they enter your store or eCommerce business. Customers can quickly grow bored or disconnect. You want them to understand the value of your products or services quickly.

Optimize your website landing pages, social media platforms, and physical spaces so that they make a great impression. You also want to inform customers about the best that your business has to offer.

Unlock free or discounted products

It’s fun unlocking a free product after a number of purchases. Offering unique products that can only be won by unlocking them can make it even more exciting.

Retarget to engage lost customers

If you’ve lost a customer, it’s worth finding a way to re-engage them. Retarget your marketing and communication campaigns. Appeal to whatever it is that your customers liked in your products before while addressing possible reasons for leaving.

If you believe that you have lost customers to lower-priced competitive products, consider offering a popular product at a reduced cost. Alternatively, offer a reason to pay more, like a charitable cause.

Utilize cause marketing

Cause marketing is an excellent way to build customer lifetime value and overall loyalty. If your customers believe that you share their values, they may be willing to spend more.

You may also keep customers who would otherwise be looking elsewhere for a brand with a cause. 64% of people avoid brands if they don’t believe in the social impact that the company is making. A third of customers have stopped buying from brands since 2019 because they don’t trust the brand or its commitment to social well-being.

Your churn rate may already be affected by customers leaving because they don’t know what you stand for. By choosing a cause, you can immediately reduce the churn rate.

Your cause-related marketing can be integrated throughout your marketing campaign. Have a donation app attached to the checkout process or mention the cause in emails reminding customers about abandoned shopping carts, and much more.

Invest in automated email marketing

Email marketing can be a very useful way to reduce your churn rate. Specific email marketing is especially effective. An email prompting clients to finish shopping when they have abandoned their carts can directly result in income as well as keeping customers. This marketing can also improve the consumer experience while increasing purchases.

An average conversion rate of .09% may not sound like much. However, consider how little effort and investment it requires to put an automated email campaign into place. This is a small investment that has meaningful value for your company.

Some instances of email interaction maybe even more successful. For instance, for fashion and apparel, there was a 3.47% conversion rate among welcome emails. It makes sense that welcome emails would do better since emails were willingly given. However, still, this is an amazing conversion rate for the expense required.

Improve customer lifetime value with cause marketing

If you want to increase each of your client’s value to you over their lifetime, cause marketing is one excellent technique. Cause marketing will improve loyalty throughout your customer experience. It is effective from the moment customers become aware of your brand and through many purchases throughout their lifetime.

If you care about and value CLV and want to give cause marketing a try, ShoppingGives can help. We can integrate cause marketing throughout your marketing plan to help you improve your average client value.

Originally published at https://shoppinggives.com on May 15, 2020.