Customer lifetime value: what it is and how to calculate it

The customer lifecycle represents the entire journey that a person takes during their relationship with a company. It starts from the moment the lead has their first interaction with marketing until the end of their negotiation.

However, during the journey this consumer may be lost, not continuing the relationship with the company. It is to measure and avoid this type of deviation that there are metrics such as CLV and LTV.

Customer Lifetime Value (CLV) is the revenue that the company expects to obtain throughout the entire relationship with a customer . This calculation helps the business understand its sales processes and closely observe the purchasing habits of its audience.

Follow the content and learn how to calculate Customer lifetime value and increase your business’s profit margin.

What is Customer Lifetime Value?

Customer Lifetime Value (CLV) is a metric that represents the revenue that a customer generates for the company over a specific period of time.

This KPI aims to help businesses understand the investments needed to win a new customer.

The calculation takes into account aspects such as:

  • Customer acquisition cost;
  • Investments in Marketing;
  • Operating expenses;
  • Purchase frequency;
  • Manufacturing costs.

In a practical way, with CLV it is possible to understand what companies’ investment needs are, helping to identify bottlenecks and enabling changes in sales and marketing processes .

Differences between CLT and LTV

Despite being complementary concepts, Customer lifetime value and Lifetime Value have different objectives.

Lifetime Value is a metric that indicates how much revenue a customer represents within a certain period of time. With LTV, the company can observe how much value a person invests in their business.

Customer lifetime value goes a little further, with it it is possible to identify the revenue that the customer represents, but not only that. With it, we also observe how much cost and expenses this consumer represents.

In other words, in addition to the profit margin on a purchased product, the production process, investment in marketing and all other processes that led this consumer to the product are also calculated.

How to calculate Customer Lifetime Value

Customer Lifetime Value is an important KPI for understanding a customer’s value to the organization. This calculation is simple to carry out, but you need to have some important information on hand, such as:

  • Average order value : This number represents total revenue divided by the number of orders placed by a customer. At this point it is necessary to consider the entire production chain;
  • Purchase frequency rate: here it is necessary to divide the total number of purchases during a period by the number of individual customers who purchased something during that same period;
  • Average customer lifespan: this is the average period of time that a consumer continues to purchase from your company;
    Profit margin: this number refers to the profit that the company expects to obtain throughout its negotiation with the consumer.

How to increase Customer Lifetime Value

Now that you know Customer Lifetime Value and its formula, it’s time to learn how to increase this indicator and extract the best from your business.

Check out the main strategies for this:

Optimize services

Customer Lifetime Value is linked to all areas that are involved during a person’s purchasing journey . From the moment she comes across the company until after she makes a purchase.

This means that, throughout this process, the consumer must have clear access to the information they need, be able to use the company’s website, store or social networks easily and find what they are looking for.

To do this, it is necessary for the enterprise to make sure that all its services are working well and are optimized so that the consumer experience is positive.

Be transparent

Transparency is the key to a company’s success. After all, a consumer only decides to do business again if their first experience was positive.

To ensure a profitable relationship, be transparent regarding the delivery of products or services, create a website with the main information about payment methods, delivery and everything necessary for the customer.

Additionally, set aside a page to answer consumers’ main questions. This space optimizes the purchasing journey and even reduces the number of people needing service.

Create loyalty programs

Loyalty programs are allies when it comes to retaining a consumer. This is because it is a way of rewarding a person who constantly buys from the brand.

Initiatives like this encourage the customer to buy again to reach the necessary score, the rewards can involve discounts, new products, special kits and much more.

A positive point of this strategy is that the brand can be in constant conversation with this consumer. Since email marketing and WhatsApp messages can be sent to remind that person of your benefit.

Furthermore, this approach suits different business models. Large organizations like Burger King, for example, have customer benefit programs, as do small businesses like neighborhood pizzerias.

Customize

In a market with so many options, what makes a company unique? Personalization is the key to showing your target audience what makes your business different and what makes it worthwhile.

This feature can be included during service, on the website and even on the brand’s social networks. From this, the consumer becomes more easily able to recognize the advantages of this investment.

Furthermore, don’t let automation make contact with customers robotic, create messages that emphasize the company’s proximity to its consumers.

Improve the customer experience

Every topic we’ve covered so far has a direct impact on the customer experience. This is something so important that the company must always be one step ahead and make sure that its consumers have the best possible experience.

Let’s think practically, a person who enters a website and cannot find the information they want, gives up and looks for another one. Just as a consumer who had a problem and was unable to receive assistance, also gives up on the company and looks for another.

With this, we can see that each step taken by the customer is a potential moment of giving up. Therefore, it is essential that the company builds an impeccable experience from beginning to end.

It is worth keeping in mind that, to ensure this positive experience, it is not necessary to invest a lot of money in extravagant campaigns and large technological automations in customer service.

This is because it is the details that show the potential of a business, whether on social media with well-thought-out publications or on customer service channels.

Make the payment process easier

Although it may seem like a simple step, the payment process is one of the most important moments during a person’s purchasing journey. If she has gone through all the steps and still hasn’t given up, it could be now.

To avoid the famous cart abandonment, the company needs to think about this moment strategically and make payment as easy as possible.

This is done by offering different payment methods, such as pix, credit and debit cards and bank slips. Additionally, make sure that all card brands are accepted to avoid cancellations.

Upsell and cross sell

Upsell is a strategy where the company encourages the customer to buy a more complete version of a product they have chosen. Cross sell is a “bundled sale” where additional products or services are included in the purchase.

These approaches allow consumers to learn more about the solutions the company offers and find new purchasing possibilities. Furthermore, it is a way to always offer an evolution in the purchase .

As a result, the value of this customer to the company increases, making the customer lifetime value even more enhanced.

Invest in after-sales

After-sales is a necessary strategy to ensure consumer loyalty after making their purchases. Furthermore, this is when the company can find areas for improvement and evolve .

To make sure the customer had the best experience possible, contact them after the purchase, via email or another channel, and ask what the customer thought of the product and the purchasing process.

Conduct satisfaction surveys and monitor comments on social media and company websites. And also, keep an eye on review sites.

It is worth remembering that after-sales is a time to cultivate a good relationship between company and consumer. Therefore, be present and be a support for the person who trusted and invested in your business.

All ready to increase CLV

Customer Lifetime Value is a metric that represents the profit that a consumer generates for a company over a certain period of time. This calculation takes into account all the processes that involve a person’s purchasing journey.

Through this calculation, the company is able to understand what its investment needs are, what changes should be made to its Marketing strategies and what the best and most viable sales approaches are.

Despite being very similar to Lifetime Value, CLV analyzes aspects that are relevant throughout the consumer’s relationship with the company. This includes the product production chain, Marketing strategies, service and much more.

To ensure the increase of this metric, it is necessary to offer a positive shopping experience to the consumer, invest in loyalty and optimize processes to ensure ease of purchase.

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