Defining customer lifetime value and how to increase it

Customer lifetime value (CLV) is a number that represents how much you expect a customer to spend with your business during their lifetime, or as long as they do business with you.

Identifying each individual or client CLV makes it clear that some customers are more valuable to your company than others. "In some businesses, a single customer could be worth more than 10 others based on their behavior over the life of the relationship," says Brent Bouldin, co-founder of digital marketing firm New Media Advisors.

When you know their value, you can categorize or segment customers into groups in ways that help you decide how to market to each—and to prospects like them. Companies also use this information to set budgets for sales, marketing, and retention efforts for each group.

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."