Acquiring new customers is certainly one of the most important aspects of running a small business, but SMB owners also can’t forget that keeping existing customers coming back is just as crucial to the long-term survival of their businesses. This is the reason why customer lifetime value (CLV) – the total amount of money you can reasonably expect from repeat customers over the lifetime of their relationship with your business – is often closely monitored by successful small business owners.
Maintaining a strong CLV number is important for a variety of reasons. First, it can increase your profit margins, since it generally costs less from a marketing and advertising standpoint to attract an existing customer than a new one, since, ideally, existing customers have already had a positive experience with your business. Second, strong CLV puts your business in a much better position to thrive in the future since it is a strong indicator of future sales. Third, a weak CLV number can tell you the areas of your marketing and customer experience strategies that need changing and improvements.
What You Can Learn from CLV
CLV allows you to:
- Recognize your best customers. CLV will tell you which customers most frequently spend money with you and which ones spend the most per transaction. Knowing the profile of your biggest spenders allows you to conduct marketing campaigns in a hyper-targeted way, focusing on those channels that you know will reach those who have the potential to spend the most. But beyond that, it can help you retain existing customers. Whether you’re in the accounting or retail businesses, these are the customers that you probably want to offer special discounts to; provide individual customer service to; and to whom you would showcase the products or services you may want to promote more heavily.
- Improve Forecasting. By forecasting what products and services repeat customers may want over a future time frame, you should be able to effectively manage inventory and allocate marketing and sales resources.
- Segment customers. Calculating CLV allows you to categorize your customers into groups based on which ones are likely to make a repeat purchase. This will allow you to effectively tailor your marketing strategy and increase lead conversion rates.
- Figure out ways to keep customers coming back. Most importantly, CLV will allow you to customize your marketing to encourage customers to make repeat purchases from your business. Remember, repeat business is essential to your future growth.
The simplest way to measure CLV is to multiply the average purchase price (aka average value) by the
average number of times a customer makes a purchase (aka average customer lifespan). This formula should apply if you are using CLV to predict your future sales flow, even if your sales are seasonal and inconsistent.
If you don’t have much in the way of sales history data, however, this formula may be tricky because you’re going to have to estimate both average purchase price and average customer lifespan. Guessing average purchase price and average customer lifespan will likely result in a high margin of error.
How do Everyday SMB Owners Calculate CLV?
While the equations may seem complicated, and small businesses sometimes seek the help of outside marketing firms to calculate CLV, many have created a system that allows them to determine this number in-house. . Kapitus spoke to everyday business owners to discover not just how they calculate CLV, but the ways they try to improve it.
Zach Goldstein, founder of athletic apparel line Public Rec, said the best way to improve CLV for an eCommerce business is to examine and improve the pages on your website in which potential customers are leaving.
“We use the average order value our customers buy annually multiplied by their average lifetime value to determine the average CLV for our business,” said Goldstein. “There are multiple ways to improve CLV depending on where users drop off in your sales funnel.
“The best way to increase CLV is to optimize your customer retention. First and foremost, this means analyzing your sales funnel to see at what step or event in the browsing process your users tend to abandon the site. From there, you implement strategic changes to your website design or in reaching out to the customer via email to gain feedback on what works.”
Chris Gadek, vice president of growth at billboard company AdQuick, said creating strong customer retention starts with personalized customer service.
“CLV shows how loyal customers are to your product and your brand,” said Gadek. “Creating a sentimental value between customer, product, and business increases revenue and retention. As a metric, you can describe lifelong customers as those who continuously interact with your platforms or continually purchase products from your website at a consistent pace.”
Prioritize Customer Loyalty Programs
Jason Sherman, founder of TapRM, an eCommerce platform for craft beers, said the key to improving CLV is to focus on customer retention marketing.
“Your RPR [Repeat Purchase Rate] shows how often customers make repeat purchases,” said Sherman. “To calculate it, first find the number of customers who placed an order, let’s say, in December. For that same month, find the number of repeat customers. Then divide the repeat customers by the total customers…You can improve your RPR through customer retention strategies such as an optimized customer life cycle, loyalty programs, retargeting ads, and cart abandonment emails. This creates a better post-purchase experience that drives customer loyalty and increases repeat sales.”
Brandon Adcock, CEO of Nugenix, which manufactures and sells men’s dietary supplements, also said that offering discounts and retention programs are key to the survival of his company.
“We measure our customer lifetime value by looking at their average purchases, both amount and frequency, and projecting that at a similar rate into the future,” said Adcock. “But importantly, customers aren’t static, and neither are businesses. Prices and products change, and the world of e-commerce is growing more competitive by the day. We build CLV by fostering long-lasting relationships with our customers through discounts, special offers, and quality outreach marketing that creates a positive image for our brand.”
Focus on Customer Onboarding
Steven Walker, CEO of Spylix, emphasized that a company’s CLV will automatically be strong if customers have a good initial experience.
“We use the simplest formula for calculating customer lifetime value: the average order total multiplied by the average number of purchases in a year, multiplied by the average retention time in years,” said Walker. “Based on current data, this estimates the average lifetime
value of a client. With data from specific categories, you may utilize this data to better focus retention and promotional activities.
“Introducing new clients to your business, explaining what you do, why it matters, and why they should stay” are paramount, said Walker. “Long-term client relationships need trust. Buyers will return if they feel your organization gives the greatest deals on their desired items. It works because building real relationships with consumers keeps them coming back.”
Build Your Future
Whether you own a law or accounting firm, or a construction or plumbing company, repeat business is crucial to the survival of your company as it ensures that customers will keep coming back in the future. While there are several ways to calculate CLV, at least part of your marketing and sales focus should be on encouraging customers to return.