A Simple Guide for Customer Lifetime Value

Posted By: editor
Posted On: 03 Sep 2020

Customers are the foundation of any business’ success. Every Successful business has lots of customers returning to make yet another purchase thus spending more money in due course of time. It thus became necessary to quantify this fact into a metric which can be measured as a means to understand their customers and make informed business decisions to further improve the various business processes. 

Hence the term Customer Lifetime Value started to come into use in the 1980s and is one of the most crucial metrics measured and analysed by all businesses before taking any important business decisions.

What is Customer Lifetime Value?

 

Customer Lifetime Value represents the total money that a customer will spend on your products or services during the entire time period they are expected to interact with your business. It is a prediction of the net profit earned based on the interactions with the customers through their loyalty for a Brand. 

What is the need to measure Customer Lifetime Value?

 

Calculating and monitoring Customer Lifetime Value is essential for every business. It helps to identify high-value customers for companies to focus on and enhance revenue coming from these customers by providing them with facilities like better deals and offers, better customer support to increase their sales further.  Let us see how managers from different verticals in a company find CLTV useful:

Importance of CLTV in Administration – Let us take an example of a CEO of a company, he is looking to expand his business and is looking at investors and banks to provide him with the funds. Now these funds will be released based on future revenue projections with the increased infrastructure. CLTV comes into play while calculating these future projections. Also, a Healthy CLTV indicates a decent assured business and better ROIs, indicating the best time to expand in a sustainable manner. 

Importance of CLTV in Marketing – The goal of determining lifetime value for any marketer is to make sure that the marketing campaigns are profitable. CLTV gives an indication to probable ROIs of a marketing campaign. It helps Marketers optimize budgets in each campaign and also gives clarity on how much to invest on which customer segment. For instance, a marketing manager is planning for a paid campaign in Google. She has an idea of the number of clicks the ad will generate within a particular timeframe, based on keyword trends. She also has a basic idea about the bounce rates on her landing page and the number of leads that will be generated from those clicks. This will help her get clarity on the expected number of customers she can expect from this particular Google Campaign.  Now using CLTV she can get a projection of the expected revenue/profits that will be generated from this campaign, enabling her to easily calculate ROI and optimize her budgets accordingly and set benchmarks for each campaign. 

Importance of CLTV in Production – CLTV calculations are important to even production managers. A Dropping CLTV trend after a change in production materials might indicate a quality issue. Again, cost-cutting can be done and margins can be improved if CLTV is unaffected. 

Importance of CLTV in Logistics – Let us take an example of Head of Shipping of a company that operates using 3 different shipping partners. She can evaluate the efficiency of each shipping partner by the CLTV of their serviced customers. CLTV can decrease due to delayed product delivery, damaged products received poor packaging, poor return policy, lack of proper shipment tracking amongst other things. Hence CLTV figures are really important in this case. 

Importance of CLTV in Sales – Understanding a Customer’s CLTV is an important insight even for Sales Teams. The sales pitch would be different for a high valued client, for example: A sales Manager would look to include a lot of value-added services to clients with high CLTV so as to maximize revenue from them. While with clients with lower CLTV, the sales pitch would be more in tune with retaining the customer and offering them offers and discounts. 

Importance of CLTV in Customer Support – CLTV is very important to customer support teams. Since CLTV increases with returning customers and that happens only when customers are satisfied. CLTV can be used to measure Customer Support Efficiency, and can also help to identify high-value clients so that more focussed and prioritized support can be provided to them. For example A customer support manager can look at the CLTV trends of customers serviced by an executive to judge his or her efficiency. He can identify High-Value Clients & allocate the best executives to handle them. 

What is the formula of Customer Lifetime Value?

In most cases, the Customer Lifetime Value is calculated using the following formula: 

Customer Lifetime Value = Customer Value x Average Customer Lifespan 

Where,  

  • Average Order Value = Total Sales / Order Count 
  • Purchase Frequency = Total Orders / Total Customers 
  • Customer Value = Average Order Value x Purchase Frequency 
  • Average Customer Lifespan = Average Number of Days between the first and the last order of a customer. 

How to calculate Customer Lifetime Value in Excel?

There is a very simple way to calculate CLTV in Excel. We just need the frequency of purchases by a customer, an estimated time period that he is expected to be loyal to a Brand and Gross margin. Gross margin can be obtained by subtracting the cost of goods sold from the net sales revenue. 

CLTV = Frequency x time x gross margin 

Let Us Consider an example: 

 YEAR 1: ACQUISITION YEAR 2 YEAR 3 
TOTAL REVENUE $2,700,000 $1,562,500 $1,203,125 
MARKETING COSTS $120,000 $5,000 $5,000 
CUSTOMERS 10,000 2,500 1,750 
RETENTION RATE 25% 70% 80% 
ACQUISITION COST $12 $0 $0 
ORDERS PER YEAR 1.2 2.5 2.5 
AVERAGE ORDER SIZE $225 $250 $275 
COST OF GOODS $1,890,000 $1,093,750 $842,188 
TOTAL COSTS $2,010,000 $1,098,750 $847,188 
GROSS PROFIT $690,000 $463,750 $355,938 
DISCOUNT RATE 1.00 1.08 1.16 
NET PRESENT VALUE $690,000 $429,398 $306,843 
CUMULATIVE NPV PROFIT $690,000 $1,119,398 $1,426,241 
CUSTOMER LTV $69.00 $111.94 $142.62 
 
 

The following steps will help calculate Customer Lifetime Value in Excel in another approach: 

  1. Start with your total revenue generated in a particular year (A) 
  1. Next, Calculate the number of new customers gained (B) 
  1. Then add up your total marketing costs across all channels. (C) 
  1. Total marketing costs across all channels(C)/number of new customers gained (B) = Acquisition cost per customer (D) 
  1. Now you need to count the number of orders serviced (E) 
  1. Number of orders serviced (E)/number of new customers gained (B) = Average Orders Per Year (F) 
  1. Total revenue generated in a particular year (A)/E = Average Order Size 
  1. Cost of Goods (G) + Marketing Costs (C) = Total Cost (H) 
  1. Total Revenue (A) – Total Cost (H) = Gross Profit (I) 
  1. Assuming a Discount Rate that is a standard in the specific industry, we arrive at Discount Rate (J) 
  1. Discount Rate (J)* Gross Profit (I) = Net Present Value (K) 
  1. Cumulative Net Present Value (L) = Sum (K1 + K2 + K3) 
  1. Cumulative Net Present Value (L)/ New Customers Gained (B) = CLTV 

A company may sell its products and services in multiple countries. It uses eCommerce platforms for their Online Stores. They have different marketing platforms, payment gateways, inventories, logistic channels and target audience in each country. Hence, businesses are bound to use several tools and applications for each job to be done. 

Profits/Losses = Sales – Expenses 

For a simple calculation of profit, the sales data will come from eCommerce sites. In Order to calculate Expenses, the marketing costs coming from platforms like Google Adwords, Facebook Ads etc need to be factored in with other expenses like purchasing stock which might come from inventory management platforms like Olabi, which further need to be added to all other expenses occurred that is usually present in accounting software like Freshbooks. Additionally, there will be different data silos for each country. Thus, you have to pull all of these data from multiple platforms for each country separately in excel, and then analyze all of this data together with the expense data and calculate profits. It involves a lot of working hours which costs money, and there is usually a time lag involved, which reduces the accuracy of the analysis and its effectiveness as the data is not analyzed in real-time. Thus it becomes necessary to consolidate all of the data in a data warehouse. Daton is a fully-managed, cloud data pipeline that seamlessly extracts relevant data from many data sources for consolidation into a data warehouse of your choice for more effective analysis. The best part analysts and developers can put Daton into action without the need to write any code.

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How to track Customer Lifetime Value in Google Analytics?

  • Sign in to your Google Analytics account 
  • Click on Audience 
  • Get the Lifetime Value Report 

Google Analytics will determine lifetime values for people acquired through different channels and mediums, like social, email, and paid search. There will be data by page views, goals, events and trends after customer acquisition. It will be easier to identify the sources which are driving the most valuable traffic and corresponding marketing investments which are truly delivering good ROI. Hence, this Lifetime Value report facilitates business owners acquire data to understand how valuable certain users and customers are to their businesses based on their lifetime performance.

10 Effective Tips to Maximize Your CLTV

 

These are the most effective tips to maximize your CLTV: 

  • Identify the most frequently recurring issues that are being reported. Start providing solutions for common pain points of your Customers.  
  • Customize every Customer experience which is of paramount importance if you want customers to be happy and spend more on your business in the long run. 
  • Offer effective Customer support as an investment for your business growth and customer retention. 
  • Personalize the onboarding process depending on the customer persona. Make it simple and faster making a positive first impact on the customers. 
  • Upselling and Cross-selling campaigns for companies who sell several complementary products or services, have different pricing tiers, or charge based on product usage, seats. These are the most effective ways to increase your CLTV, i.e. the amount of money your customers spend on your business. 
  • Provide an option for transparent feedback, reviews and testimonials. You cannot grow your business without knowing your customers thoroughly. 
  • Customer Segmentation allows you to narrow down the focus and prioritize. This will ensure higher customer satisfaction and increased CLTV. 
  • Loyalty Programs not only help to retain existing customers but also acquire new ones without spending on marketing. 
  • For recurring subscriptions, the total amount of time that customers continue paying for it is one of the most crucial components for impacting your CLV. 

How does Customer Lifetime Value affect your business?

 

As CLTV is important to every business, lack of proper analysis of CLTV, however, leads to a lot of Problems and hindrances that eventually lead to decreased revenue and profits. Let us take a few examples:

Marketing managers for instance who do not take CLTV into account, won’t get a clear idea on the projection of the expected revenue/profits that will be generated from a paid Google campaign. Hence, he will be unable to optimize his budgets correctly and set benchmarks for each campaign. 

High CLTV will imply an assured business and better ROIs, helping the administration to decide the best time to expand in a sustainable manner. Without the correct calculation, they will not be able to take informed decisions. 

A Sales Manager cannot include a lot of value-added services to clients with high CLTV so as to maximize revenue from them. 

The production team might not be able to lower down the cost if the alteration in CLTV calculations is not available to them. 

Improper CLTV calculations will lead to inefficient shipping units and lower customer satisfaction. 

Without CLTV, a customer support manager cannot identify High-Value Clients & allocate the best executives to handle them. 

Summary

Customer Lifetime Value, thus proves to be a crucial metric of any business. If you can relate to any of the above situations that you are currently facing, then you might want to consider the following effective solutions immediately: 

  1. Doing deeper analysis of your Data. 
  1. Calculating CLTV and ensuring that all of your different verticals are communicated thoroughly. 
  1. Regular audit of various business operations by all the teams. 
  1. Ensuring that your business consists of the proper infrastructure for data analysis. 
  1. Professional CRO Service. 

Even if you detect the pain points, it becomes difficult for an organization to offer unbiased solutions for each problem by itself. Hence, it is reasonable to take help from experts. 

Saras Analytics provide the best solutions from seasoned Business Analysts.

Sign up for a free consultation now! 

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