Defining Customer Lifetime Value and How to Increase It

Smart small businesses calculate customer lifetime value and use it to forecast sales, set budgets, and guide marketing decisions.

Ready to start your business? Plans start at $0 + filing fees.

Excellent

by

Sandra Beckwith

Sandra Beckwith has been writing for traditional and online publications since she sold her first magazine article while still a journalism student. Her articles in business, consumer, trade, and custom magazines; in corporate, alumni, and nonprofit organization publications; and on websites and blogs help readers learn more about successful initiatives and interesting people, or about how to do something better, faster, or smarter.The author of three traditionally published nonfiction books and a past contributing editor of three trade journals, Beckwith writes frequently on small business, logistics, supply chain, and work-life balance topics.She is also a national and regional award-winning former publicist who teaches authors how to market their books. Her book marketing website, BuildBookBuzz.com, has been recognized for excellence by four organizations and is ranked in the top 10 globally for book marketing blogs. She has served on the board of directors of the American Society of Journalists and Authors, where she remains an active volunteer and member. She is also a member of the Association of Ghostwriters. Beckwith is a graduate of Utica College of Syracuse University, a past member of its Raymond Simon Institute board, and a recipient of its Outstanding Public Relations/Journalism Alumna Award. A resident of a sweet little Erie Canal village in Western New York, Beckwith listens to audiobooks every evening while walking along the canal's original towpath for exercise. Her hobbies include eating, sleeping, and spending time with friends and family—but not necessarily in that order.

How to calculate and use customer lifetime value

To calculate customer lifetime value:

Determine the average value of a purchase for each customer type or segment
Multiply that by the number of times they will buy each year
Multiply that number by the number of years you expect them to be a customer.

Keep in mind that customer value can include how much business they refer, as well.

At EverPresent Inc., a small business that helps people digitize and organize home movies and photos, co-founder Eric Niloff used customer lifetime value averages from order data to discover the relationship between the size of the initial purchase and what the customer is likely to order next.

"For example, for clients spending below a certain amount, we've realized they are likely testing us out, so their email promotions focus on a repeat purchase with messaging around finishing the project. For clients spending above that level, the odds that they have more to do related to a specific project diminish dramatically, so they will get email marketing about a complementary service," he says.

How to increase each customer's value

As long as your marketing costs don't exceed revenue, a higher CLV will help create a more profitable business. Here's how several small businesses are doing it.

Offer more to your best customers

Jason VanDevere, CEO of Goal Crazy Planners, recommends developing a separate marketing campaign for customers with the highest CLV. "With this demographic, elicit repeat purchases with customized thank you messages and small gifts like a discount code or gift card. The key is to consistently nurture your customers in novel ways, offering new incentives and responding to their feedback," he says.

Seek and leverage customer feedback

Request feedback with surveys and phone calls. "Don't be shy—reach out to your customers to see how you can improve your product. The primary way to have a great CLV is to have a fantastic product that people love," says Grant Aldrich, founder of OnlineDegree.com.

David Adler, founder of The Travel Secret, uses feedback for more than improving the business. "Thank customers publicly and acknowledge their contributions. Giving your customers credit for their input and making them feel recognized will help encourage them to advocate for you and keep giving feedback," he says.

Focus on customer service

Providing excellent customer service greatly reduces the churn rate, according to Stewart Dunlop, founder of digital marketing agency LinkBuilder.io. "All things being equal, if people like you and feel like they're being treated well, they're going to stick around as a customer longer," he adds.

Recommend related products or services

In addition to creating a process for recommending companion products during the checkout process, offer a discount when customers add a designated related product to their purchase.

Offer more than one way to buy

During the coronavirus pandemic, many brick-and-mortar businesses decided to add an e-commerce component. Maria Haggerty, co-founder of e-commerce service provider Dotcom Distribution, says offering more purchasing ways also helps increase customer lifetime value. "Your job is to provide an integrated, seamless experience as they move from store to computer to mobile device," she says.

Customer retention is key. "If you can retain customers, they're more likely to be brand advocates and recommend your product or service to their community, which will bring in more leads and revenue," says Annabel Maw, director of communications at JotForm. "It's a win-win."