When you’re running a business, whether it’s an eCommerce store that sells products or your primary revenue comes from selling online courses, you’re trying to sell as much of what you offer to everyone within your target audience.
Finding new customers is a difficult task. You have to go out and tell people about your business, you have to pick up cold calling, or you have to create and pay for advertising. It’s no wonder that one of the most important metrics among startups is CAC or customer acquisition cost.
To create a sustainable business, you need to keep your CAC low, or at least lower than how much an average customer is going to spend on your business in their ‘lifetime”. The latter concept is called customer lifetime value (CLV).
Knowing the lifetime value of a customer is essential for building a profitable enterprise. In this article, we’ll show you how to calculate customer lifetime value, break down the customer lifetime value formula and introduce a few ways to improve the average customer lifespan in your business.
What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) measures the total amount of revenue you can expect, on average, to get from a single customer as long as they keep buying from you.
Example: If an average customer subscribes to your service monthly for two years, you can calculate CLV by multiplying their monthly subscription fee by 24 months.
Why does Customer Lifetime Value even matter?
Knowing your customer lifetime value is critical to running a sustainable business because your customers are not free — you have customer acquisition costs associated with every transaction.
At the same time, every business has a churn rate or a metric of how much its customer base is shrinking every year without adding new customers. If you increase your customer base by 10% a year but your churn rate is also equal to 10%, then you’re not growing your business at all.
A business with a low churn rate or a high retention rate is considered to be “sticky” — they are usually great at keeping the existing customers satisfied. All things being equal, a business like that would have high customer loyalty and high customer lifetime value as a result.
Understanding how much your customers are costing you
Building new customer relationships can cost you five times as much as retaining loyal customers who already love your product or service.
Improving your business or organization’s customer retention by as little as 5% can also lead to over 25% increase in profits.
Imagine that on average customers spend $100 overall with your business. If your average acquisition cost is $120, this means you’re effectively losing money on every customer and will eventually run out of cash if you don’t tame the costs or increase the customer lifetime value.
How to calculate Customer Lifetime Value
Calculating customer lifetime value might seem difficult at first. After all, how do you know for how many years any given customer will stay with you?
In addition, if you have more than one target audience, then you’ll have more than one customer lifetime value. For example, some customers might buy your product only once, while others come back every month.
If you have a complex business structure and are interested in learning about calculating customer lifetime value in-depth, your reference guide should be Calculate Customer Lifetime Value: A Clear and Concise Reference by Gerardus Blokdyk, which presents a thorough self-assessment guide for assessing customer lifetime value in various business models.
Most small businesses, however, can calculate CLV fairly easily as long as they track:
- Total revenue across customer segments
- Total number of customers
- Total number of orders
- Churn rate
It’s essential to make sure your data is integrated — ideally, within a single system, or at least as few as possible.
The Customer Lifetime Value Formula
To accurately calculate CLV, you need to go through a few preliminary calculations first.
Start with the average order value by dividing your total revenue by the number of orders in a given time period. Then, calculate how often an average customer buys from you by dividing the total amount of orders by the number of customers.
Multiplying the average order value by the average order frequency would give you customer value.
To calculate the customer lifetime value, however, we need to know the average customer lifespan first. That’s where your churn rate comes in handy. If your churn rate is 5% per year (or 5/100, which is 1/20), that means your average customer lifespan is 20 years. For a churn rate of 25%, the average customer lifespan is four years.
Finally, the formula for customer lifetime value is customer value multiplied by the average customer lifespan. So, let’s say that your average customer value is $100 with a lifespan of five years, then your customer lifetime value would be $500.
5 ways to improve your Customer’s Lifetime Value
Improving your customer lifetime value is key and should be one of the top priorities in your business/organization.
Higher customer lifetime value leads to more total revenue and higher customer retention as you’re able to spend more on customer service, enjoy reduced customer acquisition costs and even apply better strategies for acquiring new customers as you can spend more to attract highly profitable customer segments.
Here are five ideas you can implement today to increase your Customer Lifetime Value.
Invest in your customer support
Getting new customers is essential, but so is keeping them happy throughout their relationship with your business/organization. Great customer experiences lead to higher customer loyalty, less churn and more frequent purchases.
Make sure to collect customer complaints and eliminate their source from your product or service regularly.
Reward your most loyal customers
Take a hint from airlines, banks and large retail chains — all of them have loyalty programs that give customers something valuable in exchange for more money spent.
Find creative ways to share part of your profit margin with your best customers. Maybe they get discounts or free shipping, or special products, or invites to events.
Create a referral program
Referral programs make it easy for your existing customers to invite new ones to try your offerings and online courses. Since this acquisition channel generally has low customer acquisition costs, you can give something of value back to both customers, such as a temporary discount, free shipping, etc.
Customers who refer others engage with your brand more as a result and are encouraged to buy more through extra discounts. At the same time, people they refer have a more trusting relationship with your brand and are likely to buy more than they would through other acquisition channels.
Increase your average purchase value
Every time a customer is about to buy from you is an opportunity to offer them something more that they might benefit from. Think through your upselling and cross-selling strategies to maximize your potential revenue.
Upselling works by suggesting a substitute product of higher value and explaining why it might be a better fit for your customers. Cross-selling means presenting other products that are complementary to the one the customer has already selected. Both strategies help improve the average order value and the CLV as a result.
Improve your product or service
While there are many strategies to keep your customers happy, in the end, they are buying something from you for their needs, and if you make it better, they will buy more and stay longer.
Listen to your customer needs and have a clear roadmap with the goal to increase the value of your product for its target audience. While coming up with a new feature will rarely get you lots of customers overnight, it’s the most stable strategy for improving your customer lifetime value over the long term.
How to improve Customer Lifetime Value for your online course business
Research on the subject of customer lifetime value has been published for decades now. But how do you move from theory to practice?
If you’re offering online courses through your business/organization, one of the most important considerations for keeping your CLV high is integration. Having control over the user experience as well as course materials, videos, design, customer support and communication is very important. That’s why using an integrated and scalable platform like Thinkific Plus wins over a mishmash of random solutions.
Looking to increase your Customer Lifetime Value? Download your free Ultimate Customer Success Guide now.