Customer Lifetime Value: The Secret to Sustainable Business Growth

Customer Lifetime Value: The Secret to Sustainable Business Growth

Learn how to measure the value (and maximize revenue) over the entire customer lifecycle.

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A profitable business is a successful business.

But if you focus only on revenue, you might miss the key to your success: your customers.

Measuring customer lifetime value (CLV) helps you understand your customers. This metric provides insights into your customers' history, buying habits, and vulnerability to churn. Understanding your customers' buyer journey helps you make better business decisions, prioritize your highest-value customers, and build lasting customer loyalty.

What you'll learn:

• What is customer lifetime value?
• How to calculate customer lifetime value
• Key customer lifetime value metrics
• How to track CLV with technology
• Improving customer lifetime value

What is customer lifetime value?

CLV measures the total revenue a business can expect from a single customer over their entire relationship. This figure helps businesses identify high-value customers, tailor their marketing and sales efforts to these customers, and improve their profitability. CLV is essential for focusing efforts on the most profitable segments of the customer base and fostering long-term loyalty.

Why is CLV important?

Most customers expect companies to adapt to meet their changing needs. To do that, you need to know your customers well. CLV shows us where to focus our resources. With 42% of sales leaders citing recurring sales as their top revenue source, according to the latest State of Sales report, keeping those profitable customers happy and engaged should be a top priority.

This metric isn't just for show; it drives decision-making.

From marketing to sales, and even customer service improvements - knowing your customers' lifetime value helps you make smarter choices, predict future revenue, and strategize for growth. When we know who our most valuable customers are, we can tailor our services to meet their needs, boosting loyalty and reducing the chances they'll leave.

How to predict and manage risks to CLV

There are signs that a customer's lifetime value might be at risk. Recognizing these early can help prevent churn and maintain strong relationships:

1. Consistent decrease in spend: If there's a noticeable trend of decreasing spend over multiple years, it's a red flag. This might involve the customer reducing the number of products purchased or the scale of services used.
2. Increasing number of issues: An uptick in the number of complaints or problems reported by a customer can signal dissatisfaction. Proactive outreach to resolve these issues can help turn a potentially negative situation into a positive experience, reinforcing their value to your business.
3. Requests for changes: Frequent requests for changes in service or contract terms might suggest the customer's needs are evolving. Engaging with them to understand and adapt to these changes can help in retaining them as a satisfied customer.
4. Significant business changes: Events such as mergers, acquisitions, or shifts in a customer's strategic direction can really shake up their priorities, spending, and engagement. These changes might mean rethinking agreements, tweaking services to better fit their new situation, or even introducing new products that meet their evolving needs. By showing you understand and are responsive to their changes and needs, you can build trust and increase customer satisfaction.

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Examples of CLV

Measuring CLV helps you see where your customer has been so you can do what it takes to keep them coming back, turning one-time customers into lifetime customers. At its most basic, CLV is a numbers game that shows you who your most valuable - or vulnerable - customers are.

To take full advantage of CLV, you need to go beyond the numbers and ask how those numbers can help you intervene effectively to build customer loyalty and encourage spending. The customer who spends $10,000 consistently over a long period of time is already loyal. However, maybe they need to be upsold on a better version of the product they already use. A newer client who spends $50,000 a year might need to be nudged toward long-term brand loyalty through excellent customer service or personalized outreach.

Imagine that a high-value customer is having trouble with your product. What do you do to ensure they stick around? Focus on the customer by providing a great experience. This means actively listening to their concerns, addressing their needs quickly, and making sure they are using the products that best fit their needs. Since upsells and cross-sells account for 31% of revenue, according to sales leaders, this can also be an opportunity to offer high-value customers a better solution.

Paying attention to CLV matters. It not only shows you which customers to prioritize but how to prioritize them so you can make the most of the relationship.

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How to calculate customer lifetime value

Calculating CLV is straightforward. You multiply the average revenue you expect from a customer by the number of years they typically stay with you. For example, if a customer spends about $1,000 annually and usually sticks around five years, their CLV would be $5,000.

But there's more to it than just projecting revenue. It's also important to factor in the costs associated with serving those customers. This includes everything from the direct costs of goods sold to the operational expenses related to their support and maintenance. To get a true sense of CLV, subtract these costs from the revenue the customer brings in. This net figure gives you a clearer view of the actual profit they represent over their lifecycle with your company.

Here's the formula:

CLV = (Average Revenue per Customer × Customer Lifespan) − Total Costs of Serving the Customer

By using this formula, not only do we see the revenue side of the equation but we also understand what each customer costs us. This insight allows us to make informed decisions about where to invest in customer relationships and how to improve our services to boost profitability. That might look like focusing less on a low-yield customer who requires a lot of investment to prioritize on a higher-spend customer who is ready to become loyal if given some personalized attention.

But value depends on your priority. A client who spends $10,000 a year and has been doing so for a decade has a CLV of $100,000, making them a very important customer. A new client who spends $50,000 a year, but has only been a client for a few years, has a higher CLV - and is important for different reasons.

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Key customer lifetime value metrics

There are many ways to calculate CLV - and they all depend on what you want to know. Here are five common ways you can measure a customer's purchasing metrics, so you can make more strategic business decisions and evolve with changing customer behaviors and expectations.

1. Average Purchase Value (APV): This metric tells you the average amount spent each time a customer makes a purchase. To calculate APV, divide the total revenue by the number of purchases over a specific period. Understanding APV helps you spot trends in spending behaviors and adjust your sales strategies accordingly.
2. Purchase Frequency (PF): How often does the same customer come back? This metric can tell you that. Calculate it by dividing the total number of purchases by the number of unique customers during your selected time frame. If this number is high, it means customers are happy and loyal.
3. Customer Lifespan (CL): Customers have a lifespan - the average amount of time they purchase from your company. Tracking lifespan trends helps you forecast sales and see the long-term value of customer retention strategies.
4. Customer Churn Rate: Churn rate is the percentage of customers who stop doing business with you over a certain period. It's important to reduce churn to maintain a healthy CLV. To calculate churn rate, divide the number of customers who have left by the total number at the start of the period, then multiply by 100.
5. Customer Profitability Score (CPS): This score helps you prioritize your efforts toward your most profitable customers. It calculates how profitable a customer is over their lifetime, considering revenue generated and associated costs, like customer acquisition and service costs.

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How to track CLV with technology

Tracking CLV efficiently requires a solid customer relationship management (CRM) system that does more than just store customer details. Here's how technology really steps up:

1. Integration of sales data: Start by automating the input of all sales transactions into your CRM. This ensures every dollar spent is accounted for without manual entry errors. Your CRM can continuously update CLV calculations, giving you a real-time view of each customer's value.
2. Customer segmentation tools: Use your CRM's segmentation capabilities to categorize customers based on their CLV. This can help you create targeted marketing campaigns and personalized service strategies that focus resources on high-value customers.
3. Customer journey tracking: Create a customer lifecycle model, starting from their first contact and continuing through all their interactions. It's like having a bird's-eye view of their changing behaviors and how they affect their CLV. Then, you can adjust your engagement to keep your most valuable customers longer.
4. Automated reporting: Set up automated reporting in your CRM. This way, you'll get regular reports that highlight the key metrics affecting your customer lifetime value. For example, real-time reports or dashboards that track CLV metrics can help you spot trends in customer behavior. When you spot these trends, you can actively address any decline in engagement that might indicate a larger issue.
5. Predictive analytics: With predictive analytics in your CRM, you can predict future customer lifetime value (CLV) based on historical data. This helps you identify which customers are likely to become more valuable and which might be at risk of dropping off. For example, if predictive models show signs a high-value customer might churn, you can intervene with targeted retention efforts, such as offering a loyalty discount or personalized service.
6. AI-enhanced features:AI-powered tools within your CRM can automatically analyze customer data and identify trends that human analysts might miss. AI can recommend when to reach out to customers with personalized offers or alert your service team about potential issues before they become big problems. This way, you can keep your customers happy and maintain their lifetime value.

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Improving customer lifetime value

Improving CLV requires an active and customer-focused approach. By identifying high-value customers early, communicating actively and seeking regular feedback, you can build stronger, lasting relationships, find more cross-sell and upsell opportunities, and find more long-term success. Here's how:

1. Identify high-value customers early: Prioritize customers who make big purchases or show lots of interest in your company. Give them special attention, personalized offers, and premium support. They'll feel valued, which is more than just good service - it's good business.
2. Active communication: Keep a close eye on customer behavior. If you notice a decrease in engagement or an uptick in service issues, don't wait. Reach out to them to offer help or resources. For example, if a customer's order frequency decreases, a quick check-in call can uncover issues you can immediately address, preventing potential churn.
3. Improve upselling opportunities: You can discover valuable upsell opportunities by analyzing purchasing patterns using your CRM. For example, if a customer often buys a specific type of software, you can suggest a more advanced version with additional features when they renew their subscription. This can increase their lifetime value. Make sure the upsell is relevant and beneficial to them, so they're happy to make the switch.
4. Regular feedback and adaptation: Ask customers to share their feedback regularly. Use this feedback to make your products and services better. When customers know their input is valued, they're happier and more likely to keep coming back.
5. Follow-up consistently: After you address a concern or close a sale, follow up with your customer. Let them know they're a valued part of your business. You might check in to ensure they're satisfied with the resolution or to give them an update on how you've implemented their feedback. Follow-ups like these keep your brand top of mind.

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Measure your customer lifetime value and drive your business

CLV is a powerful tool for measuring customer behavior and directing you toward the customers who will generate the most value. But it's more than just a numbers game. At its best, CLV can give you a sense of your customers' history so you can better meet their expectations, creating a virtuous circle where everyone wins.

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Candice Gervase is the Salesforce Team Manager at JMP Statistical Discovery, a wholly owned subsidiary of SAS Institute. She manages a team of admins and developers as well as the overall Salesforce platform and its integrations. Candice is a certified Salesforce administrator, mentor, and career... Read More coach.