Growth Metrics Defined: CLTV

Customer Lifetime Value (CLV or CLTV) allows a company to see how much revenue an average customer is expected to bring in over time.

To do the CLTV calculation, you’ll need to know the average ‘lifespan’ of a typical customer and how much they typically buy from you.

The customer lifespan can say a lot about a business!  Naturally, a longer lasting customer is a better customer.

The customer lifetime value metric predicts how much revenue a customer will contribute over the average estimated length of time that they’ll be a customer.

CUSTOMER LIFETIME VALUE DEFINED

CLTV = Average Customer Value / Average Customer Lifespan

To calculate CLTV, you will need these two customer data points:

  1. Average Customer Value: How much does a customer spend, on average, in a particular given period as a customer? Consider frequency of purchases and average order size in this calculation.

AVERAGE CUSTOMER VALUE (ACV) DEFINED

ACV = Average Purchase Frequency * Average Order Size

  1. Average Customer Lifespan: How many years have your customers been active, in total? Divide it by the total number of customers over those years.

AVERAGE CUSTOMER LIFESPAN (ACL) DEFINED

ACL = Total Active Customer Years / Total # of Customers

As you know, loyal customers who return time and again to make large orders are hard to find. The job of a fractional CMO is to help understand who and where the best customers are that have pain points your company’s products and services can solve better than anyone.

These are known as your superpowers. Leaning into them in your marketing and sales will lead to rapid growth down the road.

What Is A Good CLTV?

This is a bit of a trick question.

What constitutes a “good” Customer Lifetime Value (CLTV) can vary all over the place, based on factors such as your industry, business model, and customer acquisition cost. 

The higher the CLTV, the better. High customer lifetime value is desirable, as it indicates that each customer is generating more revenue over their lifetime. This could well mean a more profitable business, if the cost of acquiring each customer (CAC) isn’t too high as to be unsustainable.

The best way to consider CLTV is in relation to CAC.

There is no universal benchmark for a “good” CLTV. However, a CLTV that is at least three times the CAC is often seen as a positive indicator. This ratio (CLTV:CAC) suggests that the business is generating enough revenue from each customer to cover the cost of acquiring them and still make a profit.

Calculating CLTV:CAC

For example, if the CLTV is $3000 and the CAC is $1500, the CLTV:CAC ratio would be 2:1.

The specific target for CLTV:CAC can vary:

  • Some industries, especially those with subscription-based models or high customer retention rates, may aim for higher ratios. 
  • Industries with lower margins or higher acquisition costs might find lower ratios acceptable.

Factors that can influence what is considered a good CLTV include:

Industry Norms: Different industries have varying customer behaviors, purchasing patterns, and expectations, leading to different CLTV benchmarks.

Business Model: Businesses with subscription models or high levels of repeat business often have higher CLTV values compared to those with one-time transactions.

Customer Lifespan: A business with a strong focus on customer retention may have a higher CLTV. Retaining existing customers tends to be more cost-effective than acquiring new ones.

Purchase Frequency: Customers that purchase more frequently are more loyal and more sticky.

Average Order Size: Larger orders are always more preferable to smaller orders, especially if they are frequent.

Profit Margins: Industries with higher profit margins may have higher CLTV expectations, as there is more room for marketing and operational costs.

Competitive Landscape: The level of competition in a particular industry can influence what is considered a good CLTV. In more competitive markets, businesses may need to invest more in customer acquisition, negatively affecting the overall CLTV:CAC ratio.

How Can I Improve My Company’s CLTV?

Improving CLTV means developing strategies that focus on building long-term customer relationships, increasing customer loyalty, and maximizing the value of each customer. 

A fractional CMO can make a big difference in the way you understand, attract and retain your best customers. A retainer relationship with a fractional CMO can also reduce your employee costs considerably, freeing up more capital to attract more customers and improve their loyalty with attractive incentives.

Here are some great strategies to improve your company’s CLTV:

Deliver Outstanding Customer Experience:
Provide exceptional customer service to enhance the overall customer experience. Satisfied customers are more likely to become repeat buyers and loyal advocates.

Build Strong Customer Relationships:
Focus on building long-term relationships with customers. Engage with them through personalized communications, loyalty programs, and other relationship-building initiatives.

Segment Your Customer Base:
Understand your customer segments and tailor your marketing and communication strategies to meet the specific needs and preferences of each segment. Personalization can lead to higher customer satisfaction and loyalty.

Offer Value-Added Products or Services:
Continuously assess and expand your product or service offerings to provide additional value to your customers. This can increase the potential for cross-selling and upselling.

Implement Customer Loyalty Programs:
Create loyalty programs that reward customers for repeat purchases and engagement. Loyalty programs can incentivize customers to stay with your brand over the long term.

Provide Regular Communication and Updates:
Keep customers informed about new products, services, or promotions. Regular communication helps to maintain top-of-mind awareness and reinforces the value of your brand.

Focus on Customer Retention:
Prioritize customer retention efforts alongside customer acquisition. Retaining existing customers is often more cost-effective than acquiring new ones.

Monitor and Improve Customer Satisfaction:
Regularly gather feedback from customers to measure satisfaction levels. Use this feedback to identify areas for improvement and address issues promptly.

Optimize Pricing Strategies:
Evaluate and optimize your pricing strategies to ensure they reflect the value your products or services provide. Consider offering different pricing tiers or bundles to cater to various customer segments.

Invest in Customer Education:
Provide resources and information to help customers maximize the value of your products or services. Educated customers are more likely to see the long-term benefits and remain loyal.

Utilize Data and Analytics:
Leverage data and analytics to understand customer behavior, preferences, and trends. Use this information to make informed decisions and personalize your approach.

Encourage Referrals:
Implement referral programs that incentivize existing customers to refer new customers. Word-of-mouth referrals from satisfied customers can be highly valuable.

Reduce Churn:
Identify the factors contributing to customer churn and implement strategies to reduce it. This may involve addressing common pain points, enhancing product features, or providing additional support.

Invest in Employee Training:
Ensure that your employees are trained to deliver excellent customer service. Happy and knowledgeable employees can positively impact the customer experience.

Adapt to Changing Customer Needs:
Stay agile and adapt to evolving customer preferences and market trends. Being responsive to customer needs helps maintain relevance and customer loyalty over time.

Improving CLTV is a Never-Ending Process of Improvement 

Improving CLTV is an ongoing process that requires a holistic approach to customer relationship management. 

By focusing on delivering value, building relationships, and providing exceptional customer experiences, you can increase the lifetime value of your customers and contribute to the long-term success of your business.

FURTHER READING:
• Customer Lifetime Value (CLTV) – What is CLTV? at SumUp
• What is Customer Lifetime Value (CLV)? Why is it an Important SaaS Metric? at Chargebee
• What is Customer Lifetime Value (CLTV): Definition, Formula, and How to Use at Custify
• Customer lifetime value (CLTV) | Definition at uxcam