Customer Lifetime Value

Hi, Online Solutions Group here, thank you for joining us.

Today: We’ll Answer. Are all customers created equal? What exactly is the customer lifetime value? How can I use it to help my business? It goes without saying that customers are good. Without them, your business would be...well, not a business. But does that mean they all have equal value?

Imagine there’s a business called Web App Development. Their handcrafted mobile and web applications are popular with a variety of customers, but they want to focus on attracting and retaining the “right” ones.

Web App Development sorts their current customers into different types and starts evaluating each for their long-term business value.

While we hypothesized which Web App Development customers would be the most valuable, there’s a better way to do this: customer lifetime value (CLV).

CLV is your chance to be all. Instead of just looking at your customers' likes, wants, and needs, you can say, “What about my needs? How valuable are these customers to me? How much of my money should I spend to get them?”

CLV helps you answer those questions by looking at the entire relationship you have with a type of customer and estimating how much that person is worth to your business.

Knowing your target buyers’ CLV helps you grow your base of “right” customers, which helps you decide how much you’re willing to spend to keep those customers coming back.

LISTEN UP! So how do you figure out your customers’ CLV? Math. It can get tricky and there’s different ways to do it. But to help you get your feet ever-so-gently wet, we’ll show you one of the simplest ways to do CLV math.

Let’s say Sergio owns a software development company called Web App Development. To get his CLV, he needs to research how his business has performed in the past.

The 3 “past behaviors” he should look at are the average annual transactions per customer, average profit per transaction, and average number of years people remain customers.

For average annual transactions per customer, he notes that most of his customers buy once a year.

To get the average profit per transaction, he looks at the average final customer's bill, which is 1000 Euro per person. After subtracting expenses like hosting, developers hours Sergio estimates he makes a 25% profit off each bill – so that’s 250 Euro profit per customer.

For the average number of years customers remain, he calculates that his customers normally return at least 5 times in the following years, meaning they stay on as customers for 5 years.

Sergio takes the numbers (1 order per year, 250 Euro profit per customer, ordering 5 years in a row) and plugs them into a formula.

And here’s how it looks with Sergej’s info plugged in: (1) x (250) x (5) = 1250 CLV

Now that Sergio knows his CLV is 1250, he can try and improve it by keeping his current customers around longer, or use it to help him target and convert valuable potential customers.

Let’s see how Sergio might get his customers to stick around longer.

After checking things out, Sergio realizes that giving customers more personalized attention will encourage them to return several times over the following years. He brainstorms a few ways he can do this.

When his clients have upcoming birthdays, he’ll send them an offer for a “25% discount” package that has discounts on luxury mobile or web app development or custom design.

He’ll also create a loyalty program that gives customers 25% off when they make it past that crucial 2-year mark and come back to his company for a third year.

Now let’s check out how Sergio can use CLV to help him convert potential customers.

Sergio realizes he can use his 1250 Euro CLV to evaluate which of his marketing efforts are the most effective at bringing in new customers.

Right now, he has his advertising budget split equally between these 3 channels: billboards near offices with startups, mobile ads targeted at company owners, and search engine marketing targeted at business keywords and businessmans.

To find out which is working better for him, Sergio calculates each advertising channel’s CLV.

He starts by grouping his current customers by the channel they found his company through. Using his trusty formula, he then calculates the CLV of each customer group – which then becomes that marketing channel’s CLV.

His billboards have a 720 Euro CLV and the mobile ads a 850 Euro CLV. But the search ads have a 1550 Euro CLV, which is higher than his overall CLV of 1250 Euro. He should consider putting more of his ad budget into search ads targeting businessmans.

Sergio’s CLV calculations also helped him figure out the most valuable potential customers for his company: businessmans.

When he calculated his businessmans customers’ CLV, he discovered that they usually order at his company more often than once a year, so they had a higher average number of annual transactions than other customers.

He also found out that they remained customers longer than the 5-year average of other guests and that they spent more.

So Sergio should do more than just up his search ads budget. He should consider spending more on marketing to businessmans in general.

DO THIS NOW! Let’s do a guesstimate of a CLV for your business. No’s okay to take a stab at your average transactions or other numbers.

To see full examples subscribe to our channel. We will publish working examples that are usable in all European countries.

You’ve probably realized that you need to do a decent amount of research before you can jump into it. Let’s do a quick evaluation to see if you’re ready. Go to our website and fill in the online test! You find a link in the description.