Customer Lifetime Value (CLV or CLTV)
Customer lifetime value is the amount that company expected to generate from one customer during the entire relationship. From a marketing perspective, it is the amount that the customers willing to spend on our product or service.
Customer lifetime value is very important for the company to invest in marketing expenses. It will help to suggest the amount which the company should invest to obtain one customer. CLV also a tool to evaluate the effectiveness of marketing campaigns in addition to the return on marketing investment.
Formula
- Contribution margin ratio: Contribution/Selling price
- The average month of one customer: the time on average which one customer stays with us. It can be defined by 1 divided by Chun rate.
Example
Company A providing music subscription service to the customer with a monthly fee of $ 10. The contribution ratio is 80%. Base on the prior experience, the churn rate is 15%.
Please calculate the customer lifetime value.
The average month of one customer = 100%/15% = 6.66 months
CLV = 80% * (1/15%) * $ 10 = $ 53.33
It means that on average Company A will generate $ 53.33 from one customer during the entire relationship.
Important of Customer Lifetime Value
| Customer relationship management | It will show us the real value of each customer so we have to take care of them. |
| Budget for a marketing campaign | It is very useful for the marketing manager to arrange the budget for the new campaign. We need to limit our budget to acquire new customers. The cost of acquisition must be lower than the customer lifetime value. |
| To focus on long term strategy rather than a short term. | The value will encourage the management to play the long term game rather than focus on the short term benefit which customer provide within a short time. |
| To optimize our resource | As we know that our resource is very limited. So we must ensure that they will be used in the best place with the best result. |
Limitation of customer lifetime value
Focus on revenue, not profit. The calculation is only focused on the revenue which can be misleading. The company may generate a lower profit from the customer. If we use it as the benchmark on the cost of customer acquisition, we may end up with a very high cost.
How to increase Customer Lifetime Value?
As we know CLTV is very important for all businesses, so increasing it will help the company to generate more profit over time. How can we increase customer lifetime value? It is such a broad question, and we will find different answers due to business type. However, we try to summarize the main factors as the following:
Fulfill customer expectation
Customers who come to us with a certain expectation, we have to ensure that our service or product can complete their needs. If there are any gaps, there must be a proper explanation for them.
Engage with customers
Most of the business will leave their current customer aside and focus on acquiring a new one. It is correct to obtain more customers, however, it will be the problem when we allow the existing customers to turn back on us. So we must allocate the resource to engage with them to ensure their problems are solved on time, their complaints are taken into consideration. They will be happy to use our products or service.
Improve customer support
Customers’ support is the front line who will deal directly with the customer, and they are the place where customers complain to. Many companies pay less attention by recruiting new and unexperienced staff to do the job. They think that customer supports do not require any high technical skills. However, the impact is very high, when they can’t provide good service to customers, it will impact the whole business. We must ensure customer service receives proper training and they are accessed with practical KPI.
Regarding customer support, the company also needs to consider using software such as live chat and social media. Many people will prefer to find fast solution online, so it will help them on time rather than come to the office or make a phone call.
Building a good relationship
The company should consider setting up a team to maintain good relationships with customers. We should access feedback by a surprise call or visit, as many customer are willing to give feedback even they are not happy. Moreover, they will feel that we care about them, they are likely to stay with us for a longer time.