What Is Customer Lifetime Value (CLTV)?
In simple words, the customer lifetime value (CLTV) is the average amount a customer will spend on their products/services. CLTV is also a key metric to gauge how well the brand’s products/services resonate with customers, offering insights to further improve their products and services.
Why Is Customer Lifetime Value (CLTV) Important?
Customer lifetime value (CLTV) provides data-driven insights into the relationship that a brand shares with its customers. Based on this information, the brand can create strategies to improve customer acquisition, retention, support and product quality.
Not just this, D2C platforms can also employ customer lifetime value (CLTV) to improve their operations, increase profits and top line, and make product modifications based on customer preference and spending habits.
Overall, customer lifetime value (CLTV) helps enhance business profitability and enables companies to refine strategies based on the metric’s trends. If CLTV increases, it means that the brand’s investment in product development and customer has been successful but if it decreases, it indicates the brand needs to re-evaluate marketing tactics.
How Is Customer Lifetime Value (CLTV) Calculated?
Customer lifetime value (CLTV) is calculated by multiplying the value generated from a customer’s purchases with the average duration that the customer remains engaged with the business. This together estimates the total value a customer brings over their lifetime as a customer.
Formula to calculate CLTV:
Customer Lifetime Value = (Customer Value * Average Customer Lifespan)
How To Improve Customer Lifetime Value (CLTV)?
Take frequent customer feedback to understand factors contributing to the customer’s lifetime value. This can be done by talking to the customers who have made frequent purchases and by conducting surveys to gather insights about product usage, preferences, and improvements.
Increase prices of products and services in a manner that they are appropriately valued and aligned with market trends.
Deploy tactics like upselling, cross-selling and offer add-ons periodically to increase revenue from existing customers.
Brands can also create loyalty programmes or offer exclusive content to make customers feel valued and recognised. This, in turn, can help D2C brands foster brand loyalty.
Another key aspect of customer lifetime value (CLTV) is customer experience. Brands can boost retention rates and subsequently increase customer lifetime value by mapping out customer journeys, ensuring efficient customer support and offering self-service solutions.
What Are The Challenges Of Customer Lifetime Value (CLTV)?
While customer lifetime value (CLTV) is a key metric to measure a brand’s success, there are certain roadblocks in measuring CLTV. Some common ones include:
- Customers interact with brands through various channels such as social media, and email, among others, making it challenging to measure their actions, in turn, making it difficult for brands to gauge what kind of customers are adding value to their business.
- When data is siloed within an organisation, CLTV is negatively impacted due to a lack of coherent marketing as departments work independently without giving data access to one another.
- Inadequate technology systems and integration hinder the customer experience and the ability to build CLTV.
- Different product categories and demographics complicate the calculation of CLTV.
What Is The Difference Between Customer Lifetime Value (CLTV) And Lifetime Value (LTV)?
Customer lifetime value (CLTV) looks at each customer’s spending on a brand’s product to understand its worth. It tells a brand how much each person is spending on its products and services over time. This information helps brands gauge who are their most valued customers.
Lifetime Value (LTV) is similar to CLTV, but it provides a birdseye view by looking at all customers’ spending together. It helps the brand understand how much money all the customers bring to the brand over time. This also enables brands to decide how much money they can spend on advertising and marketing to target new customers.
So, CLTV focusses on each customer’s value, while LTV looks at the overall value of all customers. These metrics show a business where to find the most profits by understanding their customers’ spending patterns better.
How Does Customer Relationship Management (CRM) Help In Improving Customer Lifetime Value (CLTV)?
A CRM (Customer Relationship Management) system helps in enhancing customer lifetime value (CLTV) by facilitating seamless and personalised interactions with customers. It is a tool that gathers information about its customers’ shopping and engagement patterns with the brand. It helps different teams in the brand work towards facilitating a seamless CX.
Here’s how CRM is helpful:
- It reduces customer attrition by comprehensively understanding customers. CRM assists in addressing their concerns leading to improved customer satisfaction and decreased customer churn.
- It segments customer groups based on behaviours and preferences for a personalised offering and engagement. It enables tailored promotions and product offerings for various customer groups, potentially boosting their spending.
- CRMs provide predictive analytics for estimating a customer’s future spending, aiding businesses in prioritising customers likely to generate higher revenue over time.
- These predictive analytics also provide insights offered by a CRM for businesses to make informed decisions regarding growth strategies, revenue projections and resource allocation, contributing to improved CLTV outcomes.
