As a business owner, earning loyal customers and building positive customer relationships is likely always top of mind for you. But with so many clients to keep track of, you may find yourself having to prioritize certain client relationships over others. So how do you know which ones to focus on?
One of the best ways to determine who your most valuable customers are is by calculating their customer lifetime value (CLV).
In this article, we'll explain what CLV is, how to use the customer lifetime value formula, explain why it's a key metric for retailers to use, and how clienteling can help you improve it.
What is customer lifetime value?
Customer lifetime value, or CLV, is a metric retailers use to measure the total average revenue they can expect to earn from a buyer over a period of time. So the longer you retain a client, the higher their entire lifetime value becomes.
Your CLV will always be inversely related to your churn rate, meaning the higher your CLV is over a time period, the lower your churn rate will be for that same time period.
Customer lifetime value formula
To calculate CLV, you'll use this simple formula:
CLV = Customer value x average customer lifetime
Let's break down each of those terms:
- Customer value: This is the amount of money you expect to earn from a current customer each time they come into your store.
- Average customer lifetime: This is a buyer's purchase frequency, or how often a customer makes a purchase with you over a specific period of time. This could be a year, quarter, or month.
Now let's plug in some numbers so we can see how this formula works in practice.
Say you're a jeweler and have a client that comes to your store once a year to make a special purchase for their spouse on their anniversary. This client purchases an item worth an average of $800 per visit.
Now it's time to plug these numbers into our lifetime value model. We'll take $800 x 1 visit = $800. That means you can expect to earn an average revenue of $800 in a given year with this client.
Fashion boutique example
Now let's look at another industry for a different example: fashion. If you own a fashion boutique, the items you're selling aren't high-ticket items compared to a jewelry store selling diamonds and expensive gems. This means you'll need a client with a higher purchase frequency in order to earn a similar CLV.
So for example, let's say a fashion retailer has a client whose average purchase is around $150 per visit. They'd need to come in roughly five times a year to earn a similar CLV as the jewelry client in the example above. ($150 x 5 visits = $750).
That's why providing an amazing customer experience plays a key role in encouraging shoppers to come back to your store often and increasing their average lifetime.
What's the difference between CLV and LTV?
Another acronym you'll often see in place of or alongside CLV is LTV, which stands for lifetime value. So what's the difference between CLV and LTV?
In reality, there isn't much difference between the two. Both refer to the same metric, and you'll even see them used interchangeably.
However, some retailers will use both LTV and CLV as two separate metrics. They'll use LTV to measure the expected revenue for the store's entire client base, and then use CLV to measure revenue per customer.
Why should retailers care about customer lifetime value?
Now that you know how to calculate CLV, let's talk about why it's worth the effort for retailers. Below are just a few of the reasons why using a customer lifetime value calculation benefits you and your store.
Helps you identify your target customers
First, calculating the average revenue of your buyers helps you determine who your high-value customers are. Once you know which of your customers you earn the most from on a consistent basis, you can focus on improving your customer retention rate for that customer segment.
For those within your customer base who have a lower CLV, you can instead focus your sales and marketing efforts on building customer loyalty and satisfaction to increase their average customer lifespan.
Allows you to set accurate sales goals
Next, learning the average customer lifetime value of your valuable customers helps you increase your sales. CLV is a predictive metric that helps you estimate how much you can expect to earn from either a single customer or your entire customer base.
By using this metric, your sales goals aren't just hunches and guesses, but informed decisions that give you greater insight into your future revenue and profit margins.
Gives you insight on customer churn rates
Finally, CLV can help you learn more about customer churn at your store. For example, let's say after calculating your lifetime value metrics, you find that your younger clients are churning out more than your older clients.
This opens an opportunity for you to improve your marketing strategies to target a younger customer base. Maybe this means getting more active on social media, increasing your marketing spend on digital ads, starting a text campaign to connect with younger customers, or switching up your product offerings to ones that appeal more to that audience.
How can I improve customer lifetime value?
If you're looking to improve customer satisfaction to extend the average lifespan of your customers, clienteling is a key way to make that happen.
Clienteling is the process of building long-term customer relationships and focusing more on the buyer-seller relationship than simply closing a sale.
By using client data to personalize the shopping experience for your client, they're more likely to come back into your store and become a repeat customer, increasing their average customer lifespan.
Better yet, with clienteling software like Clientbook, you don't have to pick and choose which clients get special treatment. With automated reminders, organized client profiles, and integrations with your point of sale, your sales team can actively clientele to each individual customer, no matter how big your business.
Building a base of long-time customers takes time and effort, but with an understanding of CLV, you'll be able to see real data on how that effort is working for you. It's a critical metric that reveals insights on customer revenue, retention, and so much more.
Even better, when you pair your customer service interactions with a clienteling software like Clientbook, all of your clients can get a personalized customer experience, leading to increased sales and business growth.
To learn more about how Clientbook can help you add clienteling into your business model and improve CLV, book a personalized demo today.