The Lifetime Value Equation: Multiply Customer Worth 5x

Lifetime Value Equation- The Smartest Marketing Increases Customer Value 5x.

Acquisition of customers is costly. Majority of business organizations aim at attracting new customers, yet they often forget that there is a much stronger tool that can be used to increase their revenues; that is, to maximize the value of current customers.

According to research published by Harvard Business Review, a five percent Customer Lifetime Value (CLV) increase can increase profits by 25-95 percent. Smart marketing is not only about how to win new customers, but over time, every already existing customer can be made more valuable.

This is how you can figure out the Lifetime Value Equation and apply it to your business to grow it.

1. What is Customer Lifetime Value Equation (CLV)?

In its simplest form, CLV quantifies the amount of revenue which a company is likely to get whilst maintaining that customer.

It is not a number it is a decisionmaking tool. Knowing your CLV helps you:

Determine the amount to be spent on getting a customer.

Establish the customers that are worth nurturing.

Better project its future revenue growth.

Consider it as follows: when a customer spends [?]1,000 a month over the course of 12 months their basic CLV is [?]12,000. However, it can be easily increased 3-5x with intelligent retention and upsell tactics.

2. The Reason CLV is More Important than Acquisition Cost.

Businesses have a tendency to be obsessed with Customer Acquisition Cost (CAC). CAC matters but it is half a story.

According to Harvard Business Review research:

A 5 percent growth in customer retention will result in 25-95 percent profit growth.

This implies that any increase in retention, upselling, or repeat purchase are much more significant than the acquisition of new customers.

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3. The Life Time Value Equation: Calculating LTV.

The most basic formula that most marketers apply is as follows:

CLV = (Average Purchase Value x Purchase Frequency per Year x Years of Customer Lifespan)

Average Purchase Value - The amount of money that a customer will spend on an average purchase.

Purchase Frequency - How many times they purchase per annum.

Customer Lifespan - The number of years they remain with your brand.

Let's say a boutique has:

Avg. purchase: [?]2,000

Frequency of purchase: 3 times/year.

Customer lifespan: 2 years

CLV = 2,000 x 3 x 2 = [?]12,000

Via strategic marketing loyalty initiatives, customized deals, email marketing you might conceivably augment CLV to [?]60,000, a 5 fold increase.

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4. Another way Smart Marketing Increases CLV.

Each of the customers is more valuable by three major levers:

• Retention Marketing

Retain customers through newsletters, reminders and loyalty programs.

According to Harvard Business Review, the cost of maintaining existing customers is 5-25 percent less than the cost of acquiring new customers and generates much more ROI.

• Upselling and CrossSelling

Couple with complementary products or services or purchase higher tier products.

Case Study: A technological shop suggests a high quality headphone when one purchases a smartphone.

• Customer Optimization.

Individualize experiences, address complaints efficiently and make experiences memorable.

Satisfied customers pay more, refer others and they last longer.

5. How to monitor CLV: Measures Every Company Needs to monitor.

But in order to make CLV actionable, you should monitor the following KPIs:

• Repeat Purchase Rate - Percent of returning customers.

• Average Order Value - The average amount of money that is spent per transaction per customer.

• Churn Rate - ratio of customers who shop out of your brand.

• Referral Rate - New business percentage of the existing customers.

  
  

To track these metrics in real time, it is possible to create dashboards in Google Analytics, HubSpot, or Shopify.

6. Data to Marketing Decisions.

Clv Increasing Customer Lifetime Value is not magic, it is math + strategy. Any company, both small local boutiques and SaaS startups, can gain awareness of the value of each customer and how to maximize this value in the long run.

Begin with the current CLV measurement and then concentrate on retention and upselling, as well as experience optimization. The payoff? Every customer would be 5x more valuable, and this would provide a predictable sustainable growth trajectory.

Interested in maximising the lifetime of your customers? FutureSmith assists companies to create intelligent marketing plans that make each client a long-term profit generator.

Book a free strategy call → info@futuresmith.pro · +91 98755 37552