Your key metrics, or key performance indicators (KPIs), are there to show you how well your business is meeting the expectations of customers and converting them.
Customer lifetime value (CLV) is one of the most important metrics that should be measured.
What is Customer Value?
Customer lifetime value is the profit that an organization can expect to make from a particular customer throughout the relationship.
CLV could be revenue from the sale of products or services to customers.
- Products or Services
- After-sales service and product add-ons
- Warranty
- Subscriptions
This is not an exhaustive list.
Why is CLV important?
Focusing on the whole customer lifecycle, not just individual sales, will help you boost your business’s income and sales.
Customer value (CLV) is also an important metric to use in your marketing and sales campaigns. Calculating CLV will help you identify which customers are most likely to add value to your company throughout the customer lifecycle.
You’ll achieve a better ROI by focusing on these segments and directing your marketing campaigns to them.
CLV in B2B
It’s important to keep customers happy because they are the lifeblood of any business. B2B businesses, however, must nurture their relationship with every customer.
B2B cycles are longer and more complex by nature. This is because they require a more complicated process to move the customer through the funnel. Businesses are more focused and spend more money, so naturally, they need more convincing. Each stage, from initial outreach to ongoing support, requires a personalized, customized approach based on trust and integrity.
This approach can be very effective and lead to an increase in loyalty. Since existing customers tend to spend 67% more than new ones, this loyalty could translate into more sales. But it’s not always so straightforward–once you’ve secured a new client, maintaining the relationship takes considerable time and effort, too.
Imagine losing your customer after exhausting all those resources. Increasing customer retention is crucial because acquiring new clients is much more expensive than generating revenue from existing customers.
Retaining clients is not enough. You should maximize each client’s value by increasing their CLV. This metric will help you identify which customers are the most valuable and to whom you should devote more time. You can also see why low-value clients may not be using your services or purchasing more.
Understanding CLV in Marketing
Imagine you have a new nonprofit client. Like many charities, the organization initially has a small marketing budget. It hires you to create a new site. The contract is worth $10,000 and will include a new copy for the website, the supervision of the launch campaign, and the creation of five blog posts.
You will conduct regular meetings throughout the campaign to gather feedback and fine-tune the efforts you make over the next three months.
This regular communication and commitment pay off. When the contract expires, the company extends it for another six months, expanding your service scope to include digital marketing and social media. The $10,000 suddenly more than doubled. You’ve also created a loyal customer who believes enough in you to bring you new business.
How to calculate customer value
It is easy to calculate the customer’s lifetime value. Calculate CLV using the formula below:
Customer value = average purchase price ($) x the number of purchases the customer makes each year x the average customer lifecycle length (years).
You can determine which customers are the most important for your brand by analyzing what customer value tells you.
As an example, a software development company that serves a variety of clients may see Brand A as having value for the customer:
- Monthly retainer of $4,000 for basic website updates
- Support for data management, such as a Delta Lake Guide worth $500
- The project management fee is $300
All costs are paid on a monthly basis, and the lifecycle is five years.
CLV = 4,800 * 12 x 5
CLV = 288
Brand B has been working with this company from its beginning and has developed a strong partnership as the business has grown. It has a US website and a UK site, and it is involved in e-commerce. The costs are as follows:
- Monthly retainer for complex Website Updates: $9,000
- Support for data management, new coding development, and implementation: $3,000
- Project Management Fees: $1000
- A retainer of $5k is required for customer-focused and responsive development.
- Support for plugins and features of e-commerce: $2,000
The customer lifecycle is at least 20 years longer here because of the collaborative relationship.
CLV = 20 000 x 12 x 20,
CLV = 4.800.000
Brand B clearly has a higher lifetime customer value than Brand A.
You should be able to use this calculation with all of your customers. Some industries are easier to calculate and understand than others.
You’ll have to make some estimates, such as the duration of customer engagement with your company. Consider the following when calculating that number:
- Customers need your products
- Economic factors are external factors that can affect sales.
- Products and developments of competitors
- Different levels of customer need and desire for your product or service.
As shown in the example above, building relationships with brands that are likely to be interested and interested customers in future developments will increase your customer lifetime value.
While Brand A might choose to outsource some aspects of its technical presence, like data handling and processing, Brand B, with a strong relationship with the agency, may decide to extend the relationship and ask for support with data processing work – such as training on Python and its uses.
Customer value is ultimately about where you allocate your resources in order to maximize return on investments and build positive relationships with customers.
How to increase customer value
What can you do to improve customer value in your business? It depends on your customers, but ultimately, it is about increasing your customers’ value by improving the value your products and services provide.
Run customer surveys
Asking your customers how you can make them more valuable is the easiest way to discover.
Survey response rates are quite low. Some online survey platforms report rates of 6-16% of their users. It’s still a good deal of feedback if you have a large number of customers. Even a 1% improvement in CLV can add up to a significant amount of revenue if you fix a customer’s pain point.