Few companies can survive if they need to continuously attract new customers for sales. Regularly attracting new clients requires a serious commitment to marketing spend and a nearly limitless pool of customers. If you don’t have both, you’ll likely run out of resources, which can quickly hinder your company’s success.
One solution is retaining customers over the long term. When clients know you offer a solid range of quality products or services that benefit them, they’re more likely to stick around and provide you with a regular stream of sales. That makes it easier for you to develop new products, fund your marketing efforts, and financially support your operations.
To focus on retaining customers, you’ll need to understand how to calculate customer lifetime value and apply the results in your marketing strategy.
What Is Customer Lifetime Value?
Customer lifetime value is a forecasted number of sales you expect each client you earn to bring to your business over time. Essentially, it estimates the revenue you’ll gain from a single loyal customer. You can even calcuate ltv to know the ongoing relationship between customer and product.
To calculate customer lifetime value, you’ll need the sales history of your existing client base. You can use the data to determine the average length a customer continues to buy from you and the amount they spend monthly.
The simple formula for customer lifetime value involves multiplying the average monthly revenue you receive from one customer by the time they continue to purchase from you.
Some companies find the equation more valuable when they categorize customers according to various factors, like their demographics, buying behaviors, geographic location, and other elements.
Separating clients in this way can help you determine which types of customers are most likely to yield the highest sales revenue; you can target your future marketing activities to reach similar people.
The Benefits of Incorporating Customer Lifetime Value into Your Marketing Efforts
Knowing the average revenue a client will bring in over the long term will help you learn more about your customer base and how to retain them. You can focus your marketing strategies on indulging those who are most likely to stick with you rather than putting lots of money into advertising to people who aren’t.
For instance, if you run a SaaS (Software-as-a-Service) business, you’ll rely significantly on the customers who pay their annual or monthly subscription fees. If a client cancels their subscription, you’ll need to find another client to replace the revenue they bring in or convince an existing subscriber to upgrade.
If you have a database of subscriber sales history, you can estimate how long a customer will stay with you. That can help you determine how much you’ll need to spend on your marketing efforts to attract new clients. You’ll have better revenue estimates, which you can use toward evaluating your future operating budget.
Another benefit of knowing your customer lifetime value is having more clarity for your strategic planning efforts. You have likely established short- and long-term goals for your company. When you know your average customer lifetime value, you can set the appropriate targets for achieving those goals, whether they’re revenue-related or some other type of objective.
Finally, knowing your customer lifetime value is helpful for your customer retention strategies. If your clients leave after only a month or two of coming on board with your organization, you know something must be fixed. There’s a reason why they’re choosing not to continue.
The reasons for low customer retention will vary significantly from business to business based on multiple factors. For instance, someone may cancel their SaaS subscription because they didn’t obtain the value they were hoping for from the solution. A restaurant may not see a continuous influx of customers because they’re too expensive, the food isn’t good quality, or the service is terrible.
Companies can extend their customer lifetime value by addressing the problems that cause them to leave. Once they fix these issues, they should see an increase in customer retention.
Knowing Your Company’s Customer Lifetime Value Can Help You Make Strategic Decisions
Figuring out your company’s customer lifetime value can go a long way toward improving your marketing strategy and customer retention efforts. While you’ll need some existing sales data to calculate the result, you can continue to build upon this value as you attract new clients and your business grows.
If you use the results from the customer lifetime value calculation appropriately, you’ll find it easier to retain the customers you obtain.