What is customer lifetime value?
Customer lifetime value is a metric that measures the total income a business can expect to earn from a customer during their relationship with the business.
Or, as the name suggests, the value (income) a customer is expected to provide to the business during the lifetime of their association with the company.
How to calculate customer lifetime value?
To calculate customer lifetime value, multiply ‘average purchase value’, ‘average purchase frequency’, and ‘average customer lifespan’ (in years) together.
It is recommended that you consider the average purchase frequency of a year.
Formula for calculating customer lifetime value
Real-life example of customer lifetime value
Let’s assume you own a shoe company. A marathon runner buys shoes from your company regularly. Say, an average marathon shoe pair in your store costs $100 and he buys 4x a year from your store. His expected lifetime as a paying customer is 10 years.
Plugging the data into the formula, his CLV will be: 100 x 4 x 10 = $4,000.
What’s considered a good customer lifetime value? (benchmark)
There is no set benchmark for customer lifetime value but, a good CLV should be at least 3 times more than your customer acquisition cost. A good customer lifetime value should easily be able to cover your customer acquisition cost.
The customer lifetime value depends greatly on the nature of your business. For example, if you are a real estate agency, the repeat purchase frequency of your customer would be far less than say, a coffee company. Starbucks has been able to achieve a customer lifetime value (CLV) of $14,099.
Ways to increase your customer lifetime value
Here are some tactics to increase the likelihood of a customer buying more from you:
- Offer perks to loyal customers: Long-time loyal customers certainly deserve some perks which will encourage them to keep coming back to you. Know about some: Innovative Customer Loyalty Programs
- Keep your customer happy: This is obvious and a no-brainer for businesses. Fulfill your customers' expectations, provide them good customer support and stay in touch with them. Read: 10 Ways to Deliver Consistently Great Customer Service
- Use upselling and cross-selling strategies: Upselling and cross-selling strategies are a great way to increase the average value of a customer transaction while offering them better solutions.
Also Read: Related Metrics
- Net Promoter Score
- Customer Churn Rate
- Customer Retention Rate
- Repeat Purchase Rate
- Customer Satisfaction Score (CSAT)
- Renewal Rate
- Customer Acquisition Cost
- First Contact Resolution Rate (FCR)
- Free Trial Conversion Rate
- Daily Active Users (DAU)
- Monthly Active Users (MAU)
- Average Revenue Per User
- Referral Program ROI
- Upsell Rate & Cross-sell Rate
- Viral Coefficient
- Participant Share Rate
- Invitation Conversion Rate
- Net Dollar Retention
- Product Adoption Rate
- Sessions per User