Attracting customers and retaining them is essential for your business to grow progressively and quickly. A strategy that will help you achieve this is based on knowing how to calculate the customer lifetime value.
In this post we will tell you what that consists of. customer lifetime value and why it is essential to take it into account when making strategic decisions. Next, we will also show you its formula, how to calculate it and what to do to improve it.
What is the lifetime value of a customer?
the customer lifetime value (LTV) is also known in Spanish as customer lifetime value. It consists of a useful metric that serves to indicate the income that a business can expect from a client during their commercial relationship.
know how to calculate the lifetime value will help you make better care decisions and . This will increase their fidelity and reduce their churn.
Why should you calculate the customer lifetime value?
There are different reasons why it is essential that you understand the lifetime value or the quantification of LTV. Some of these are:
1. It directly affects your income
The customer lifetime value manages to identify specific clients that give the maximum income to your business. Knowing this makes it possible for you to serve them with services or products that catch their attention and solve their problems.
As a consequence, they will invest a larger amount of money in your business. HubSpot Research mentions that 55% of growing businesses think that it is important to invest in customer service.
But only 29% of businesses with declining revenues mentioned that this type of investment is very relevant. So, those who successfully target the customer, get more income for your satisfaction.
2. Promotes customer retention and loyalty
Your business must optimize customer lifetime value and increase it constantly. To make it, improve customer serviceprovides good products and programs that encourage loyalty.
That way, you’ll see an increase in customer loyalty and retention. The good thing is that, with loyal customers, you will lower the abandonment rate and you will increase good references, sales and positive reviews.
3. Make it easy to focus on ideal clients
Knowing the customer lifetime value and what it is, you can know how much money people invest in your business at a certain time. Armed with that kind of knowledge, you can craft a strategy for acquiring your ideal customers.
Using the formula of lifetime valueyou will have the advantage of especially targeting those who spend the most money on your business.
4. Reduce investment in attracting new customers
Acquiring new customers could be expensiveas pointed out The European Business Review in one of his articles: acquiring new customers becomes 3 times more expensive than retaining them.
Another study conducted by Bain & Company found that a 5% increase retention can produce higher profits. Even those gains can range from 25% to 95%.
This shows the importance of identifying those valuable customers who remain active in your business. Undoubtedly, determining customer lifetime value will make you profit in the .
What is the relationship between lifetime value and customer acquisition cost?
The LTV either customer lifetime value and the CAC they have a close relationship. Analyzing these concepts will help you understand how they are associated with each other and with the :
What is CAC Customer Acquisition Cost?
It is the total amount of money a business spends in order to obtain a new customer. The CAC It’s calculated by adding costs related to the conversion, including advertising, marketing, sales staff, and more.
These costs are divided by the number of customers obtained and the result is the CAC. In this way, this value allows measuring the return on investments or ROI.
How is CAC related to customer lifetime value?
compare the CAC with the customer lifetime value either LTV It is used to indicate the expenses made in marketing. If he CAC has a value close to lifetime valueor is even greater, there is a problem.
In that case, the financial health of the business is in serious jeopardy. Therefore, it is essential that you maintain a CAC reasonably lower than customer lifetime value.
VIDEO | 5 tips to reduce your acquisition cost and be more efficient
What is the lifetime value formula?
To understand the formula lifetime valueit is essential to know what the values that compose it consist of.
1. Average Purchase Value
It refers to the calculation of average amount of money a customer spends in each of their visits to your business.
Let’s take as an example that you have a coffee shop, and a customer visits you 3 times and spends 9 USD in total. In that case, the average value of your purchase it is 3usd.
2. Recurrence rate
Consists of the number of times your customers visit your business and decide to spend or . Using analytical tools to track your customers will make it much easier to average this value.
3. Average retention time
It refers to the long term amount of time by which you will be able to retain your customers. When calculating it, you can base it on the experience you have had during the years that you have been in business.
Another more practical option to make this estimate consists of divide 1 by the percentage of your bounce rate.
How to calculate the lifetime value of a client step by step?
Once you have clear the formula of the lifetime valueit will be easier for you to apply the following steps when calculating it:
1. Determine the average purchase value
To calculate this value you must know the income of your business for a certain period of time (usually 1 year). This way you will divide that amount by the total number of purchases made in that same cycle.
Use a It will help you when calculating the first value of the lifetime value.
2. Calculate the recurrence rate
You will have to split the total number of purchases divided by the number of customers individuals who purchased in that time period.
3. Quantify the value of a customer
Do it multiplying the value of each purchase average with the rate that shows the frequency or recurrence of purchase.
4. Measure the average lifespan of a customer
In order to do so, you must calculate the average of how many years will continue to buy a customer in your business. If you do research in the industry in which you develop, you will have a more accurate calculation.
Therefore, it is recommended that you analyze the experiences of businesses similar to yours.
5. Discover the customer’s lifetime value
To finish, multiply the value that a customer has by the average of its useful life. The result will be the reasonable income you can expect that average customer generates you.
These will correspond to the estimated duration of the client’s commercial relationship with your business. This is how the values involved in the formula are calculated. lifetime valueto determine the customer lifetime value.
Example of calculating lifetime value or customer lifetime value
The lifetime value examples are the best way to learn the concept of lifetime value in Spanish. Thanks to the data revealed by Netflix, it is possible to take that famous streaming service as an example.
Here we will see a report that details the averages of the subscribers’ habits, to average their LTV. Everything is displayed by following the steps that were listed earlier to make the calculation lifetime value calculation:
1. Average value of purchases
According to the company, a subscriber spends on the Netflix streaming service, approximately about $11.65 to continue enjoying the content.
This calculation was made averaging how much money customers spend in the different subscription plans available.
2. Recurrence rate
for netflix it is very easy to measure your recurrence rate. That’s because the number of payments customers need to make is already set.
As it is a subscription service, with a monthly payment, people only make 1 payment a month.
3. Value of customers
Once calculated how much an average customer spends, along with the number of payments per month, Netflix determined the value of its customers.
In this case, the multiplication of your average value of purchases, by your average rate of recurrence, It’s very simple.
Simply multiply $11.65 x 1 and the result will naturally be $11.65 average customer value. In this way, the brand averaged its values.
4. Average customer lifetime
The average useful life valued by the Netflix metric for its clients is 25 months. That number will influence the lifetime value calculation to finally set the LTV.
5. Customer lifetime value
The LTV either lifetime value in Spanish, customer lifetime value, is calculated using the data quantified above. The average lifetime value of customers is multiplied by the average lifetime of subscribers.
In this way, the lifetime value formula remains as $11.65 x 25 months = 291.25. Therefore, the customer lifetime value Netflix is $291.25.
Tips to improve customer lifetime value or CLV
Now you know what to calculate LTV can you give him a to the way you approach your business. Therefore, we want to help you increase or improve that customer lifetime value with these suggestions:
1. Optimize your onboarding procedure
Incorporating your customers into your brand means keeping them up to date with what you do in your business. Make sure you show them what you can offer and Give them reasons to keep choosing you.
How can you do it? One way is to use the data provided by customers to offer them specific offers or items Of your liking.
After that, follow up to verify that they are satisfied with the purchases made. This will help to foster the foundations of a good relationship that will increase customer lifetime value.
2. Increase the average value of orders
A smart way to increase LTV in your business is based on employing strategies to increase orders. Recognized brands such as McDonald’s’s and Amazon use certain methods to achieve this goal.
Amazon, for example, offers products associated with each other and sells them bundled at a lower price. While McDonald’s’s offers small delicious add-ons that boost customer lifetime value.
Doing things like this works because even small increases in long-term orders increase revenue. That’s because adding small amounts leads to substantial income and higher LTV.
3. Promote easy and fast communication
Customers value the ability to easily communicate with businesses and want quick responses. Because of that, you have to strive for reduce waiting time to solve the doubts and problems of your clients.
Something you can do to promote easy and fast communication is create network accounts
Facebook Comments
Disqus