Tracking the customer lifetime value (CLV) metric is crucial for businesses that are serious about their growth. Understanding what your CLV is gives you a concrete measure of how valuable a customer is to your company across the entirety of their relationship with you. When cash flow is tight, and you have to account for every cent spent, understanding and optimizing CLV can help you improve your marketing strategies and increase your revenue.
In this article, we’ll examine what CLV is, look at how to calculate it, and how to use it to grow your business.
What Is Customer Lifetime Value?
Customer lifetime value is the monetary value a customer provides to your business over the length of their relationship with you. A business may have multiple CLVs depending on their customers’ nature and how and what they purchase. Calculating CLV gives you a deep understanding of your business, cash flow, and customer behavior.
Why CLV Matters for Small Service-Based Businesses
Understanding CLV matters to a business for several reasons.
Focusing on CLV can lead to more predictable revenue streams and help improve financial stability. The longer a customer’s lifecycle, the more revenue a business will make.
CLV can help you identify issues so that you can boost customer retention. By incentivizing your customers to stay loyal to you, they are likely to spend more money and remain with you. They are also more likely to recommend you to friends and family, helping promote your business and bolster your bottom line.
Calculating CLV can help create more effective marketing strategies. Understanding how your customers find you and where they spend their time online can help you focus your marketing budget on the appropriate platforms. For example, you’re wasting your money if you spend money on Facebook ads while your customers are most active on Google.
Using CLV effectively will enable you to lower the cost of finding and retaining new customers. It can also simplify financial planning by helping you understand your revenue streams and how they change over time.
How To Calculate CLV
You can calculate CLV using the following formula:
CLV = (Average Purchase Value) x (Purchase Frequency Rate) x (Customer Lifespan).
Let’s look at each of these terms:
- Average purchase value: How much is your customer spending over a particular timeframe (most choose a year, but it may vary depending on the nature of your business and customer)?
- Purchase frequency rate: How often is your customer purchasing over your chosen timeframe?
- Customer lifespan: What is the average length of time your customer continues to purchase from you?
CLV can calculated by:
- Company level: The average CLV across all customers.
- Customer segment: The CLV for each distinct customer group.
- Individual level: The CLV for each individual customer.
Example of a Family Lawyer CLV Calculation
Clients of a family lawyer will most likely seek advice on a range of issues, including divorce, estate management (and wills), prenuptial agreements, and custody arrangements.
A client spends around $10,000 per case, returning twice a year over a 3-year period.
$10,000 (average spend per case) x 2 (consultations/cases per year) x 3 (years) = $60,000 (CLV)
Tips for Tracking and Measuring CLV
To get the best out of your CLV data, it should be considered alongside other key performance indicators (KPIs) for your business. Which KPIs you track depends on the nature of your business, but some more common ones include:
- Number of customer leads
- Cost per lead (which ties into acquisition costs for your customer)
- Return on marketing investment
- SEO KPIs such as keyword rankings
Make sure you’re conducting regular reviews of CLV calculations so that you can adjust strategies if necessary.
Four Ways to Improve CLV
Improving CLV depends on your customers and the type of business you’re running. However, some strategies apply to all businesses. When you start utilizing CLV data, we recommend focusing on these areas to increase all the criteria determining CLV.
Enhance Customer Service
Take the time to review your current customer service. From the moment your customer becomes aware of you to how you handle complaints and aftercare, each interaction is an opportunity to build loyalty. Are there areas that you could improve? How do your customers experience buying from you? Is your purchasing process frictionless?
Loyalty Programs
Loyalty programs build customer retention. If you don’t already have a loyalty program, now is the time to consider building one. By offering incentives to encourage customer spending, you can increase the average spend and the time a customer remains with you.
Upselling and Cross-Selling
Look carefully at opportunities for upselling and cross-selling. Where you offer a service, can you offer a basic and higher tier package? Offer incentives such as free shipping or a discount for spending a specific amount. Review the products you sell, which are often bought together. You can tailor special offers around these items.
Customer Feedback
Use feedback to improve services and build customer loyalty. Are you looking at your customer service data and acting on it? What do your customers love? What are they struggling with? Use that data to build services and products they want and need.
Examples of How To Improve CLV in Service-Based Businesses
Now that we understand CLV and how to use that data to increase revenue, let’s examine some specific examples for different types of businesses.
- Roofing and contracting: Offer your customers long-term contracts and recurring maintenance services. Make sure to offer customers incentives to purchase with you through discounts and special offers.
- Plumbing: As with general contractors, encourage repeat customers by offering regular maintenance packages.
- Family lawyers: Emphasize long-term relationships through various family legal needs. Use CLV data to create service packages that appeal to high CLV clients, like offering comprehensive legal packages focusing on family law, such as will-making or prenuptial agreements.
- CPAs: Offer annual tax services, financial planning and regular financial reviews.
- Chiropractors: Discuss the importance of routine visits and wellness programs with your customers.
- Veterinarians: Focus on offering regular health check-ups and treatments.
- Dentists: CLV data can help identify which treatments and services offer the most lifetime value. Marketing campaigns can then be designed to promote these services.
How To Avoid Common Mistakes When Calculating CLV
Take time to understand all of your customers. Most businesses have different types of customers, and each customer group will have its own CLV. For example, some customers buy only once, while others buy repeatedly. By understanding why your customers behave the way they do and segmenting them accurately, you can calculate CLVs correctly.
Acquiring customers costs money, so look at how much you’re spending on ads and other marketing. Once you’ve acquired a customer, are there costs associated with onboarding them? Factor these costs into your calculations for a more accurate CLV.
Don’t get caught up in focusing on the short term. Make sure you look at what your customer spends with you over an extended period of time. Rather than focus on immediate revenue, look at a customer’s long-term value and build a customer loyalty scheme that encourages people to stay with you.
Arguably the most detrimental mistake to make, data accuracy is the very foundation of determining CLV. Inaccurate data will give you an unclear picture and may lead you to spend unnecessarily. Make sure you regularly review where and how you collect your data and that it’s verified for accuracy.
Using CLV Data to Better Your Business
CLV data can be used in several ways:
- Refine your marketing strategies to tailor campaigns toward high-value customers. Use CLV data to target ads toward customers in specific zip codes.
- Offering personalized services or discounts to high-value clients.
- Adjust your pricing strategies based on the value different customer segments bring and introduce tiered service packages for specific customer groups.
- CLV data can be used to identify opportunities for new services or products. By examining CLV data, you can add complementary services based on customer purchase behavior.
- Focusing on high-CLV customers can help you allocate your resources more effectively. For example, prioritize customer service efforts for long-term clients.
Start Using CLV Data Today With Surefire Local
Understanding CLV and how it can be used is crucial to building your business. If you want to improve efficiency, manage your costs better, and attract new customers, then CLV data is a must.
Along with other key metrics such as SEO data, costs per lead and other marketing KPIs, CLV can help you assess your business’s financial status and inform you of your growth plan.
Enhance your customer lifetime value optimization strategy by using Surefire Local. Surefire Local currently helps over 3,000 local businesses gain more visibility on Google, more quality leads and more control over their entire digital footprint. Our all-in-one platform allows you to manage the customer experience from first contact to long after the sale, so you can be sure to give customers a 5-star experience. Attend a Surefire Local demo today!