How To Calculate The Lifetime Value Of Your Customers


Do you know how much your customers are worth
to your organization? 

Do you know how much money you can spend for your company to acquire new customers? 

Getting new customers takes a lot of work. You have to take your time for them to get
to know you and your product or service.  

Time for them to get to know you enough so that they will fall in love with you and start
to become a customer. 

But do you know how much time and money you can spend into this process of acquiring customers? 

Hey everyone, I’m Hans van Gent of User Growth, and today I’m going to talk to you about Customer
Lifetime Value or CLV for short. 

I will explain why this metric is one of the most important, if not the most important
metric to get your head around if you’re going to do effective digital marketing or any marketing
for that matter. 

But before we get started, make sure you subscribe to this channel, that way when we have more
marketing videos like this, you’ll get notified. 

Quick question, how many of you know how much a customer is worth it for your business? 

How many of you know how much you can spend on advertising to acquire new customers? 

If you know the answer, leave a comment with yes.  

Even if you know the answer, be sure to stick around, though as I will also give you five
tips to increase repeat customers and lifetime value. 

And if you don’t know the answer, let’s dive in straight to today’s lesson. 

Customer Lifetime value tells companies how much each customer is worth to the business. This, in turn, tells your company whether
it makes money on each customer and how much you can spend on acquiring new customers. 

CLV can be a benchmark for your companies worth, or because it shows you the significance
of repeat business, it can help you put your priorities straight. 

In short, knowing your CLV will help you answer three fundamental questions for your business:

 1. Are you paying enough to acquire customers
from each marketing channel? 2. Are you acquiring the best kind of customers? 3. How much can you spend on keeping them sweet
with email, social media or other ways of delighting your customers

 Finding answers to these questions will help
you focus on and grow your business. 

And when your business is growing, and you start to get different in house teams.  

Product, marketing, advertising, and sales teams can use CLV to calculate how much to
spend on acquiring new customers, retaining existing customers, and their ROI on marketing
campaigns and future changes. 

So how do you calculate your CLV? 

Well, there are a couple of different ways to calculate this.  

Some more complex, that takes into account things like churn rate, discount rate, contribution
margin, retention costs, etc. 

Some less complex. 

In this example, we’re going to look into calculating CLV for your e-commerce business. 

Take your average monthly revenue per customer, and you multiply that times the gross margin
per customer and then divide that number by monthly churn rate or percentage of people
that decide to end the relationship with your company. 

Let’s take a closer look at this. 

The first part of the equation, the Average Monthly Revenue per Customer.  

Look at your database for a more extended time (if you’re just starting out, look at
it as long as possible). Let’s say on average, a customer is buying
for a total of $60 per purchase, and they purchase seven times per year. The average monthly revenue per customer is
$35. 

Next up, Gross Margin per customer. 

How much margin do you create on each sale you’re making?  

Let’s say you buy your product for $45, but you sell it for $60, then your gross margin
per customer is 33%. 

And finally, your Monthly Churn Rate. 

This one is probably one of the hardest things to measure accurately.  

It shows the percentage of people that decide to end the relationship with your company
each month. 

Say you have 600 customers at the beginning of the month. At the end of the month, you have 400 customers. 

The number of customers at the beginning of the month, minus the number of customers at
the end of the month, divided by the number of customers at the beginning of the month
will give you a churn rate in this example of 33.33%. 

This may seem pretty straightforward, but churn can be tricky. 

Different factors can influence outcomes, like how you define an active user or the
time you’re looking at. But the earlier mentioned equation is a good
starting point. 

Now we know that the CLV for our customers is $34,65.  

Or in other words, for you to stay profitable, you can spend a maximum of $34,65 per customer
to acquire that customer. 

If you put that amount onto Google Ads, Facebook Ads, or whatever channel it is that you acquire
your customers from, you need to get at least one new customer for per $34,65 of advertising
that you spend. 
 Of course, this is just an average number
for all your clients, so it is worthwhile to start zooming from the bigger picture.  

For example, you can segment to see where your most valuable customers are coming from.  

By looking where you acquired your unprofitable, profitable and very profitable customers,
you can figure out which marketing channels you need to double down on.  

A simple segmentation by channel can help you find these answers as well. 

As you can see, there is always more information to get discovered if you take the time to
look at your data. 

Next up, we’re going to look at how to increase the lifetime value of your customers. 

Tip #1 – Offer Great Service and Great Customer Experience: 

 Customers come to you, and they already expect
that you’re going to provide to them precisely what they were looking for.  

They are already expecting that you’ll provide a service, a product, and they expect to have
a reasonable relationship with you during that time.  

Provide great customer experience and excellent service by going above and beyond what your
competitors are doing or what they would even expect you to do.  

Blow them away with your follow up.  

Contact them all the time!  

Let them know how their project is going; let them know where their product is.  

If ‘you’re staying on top of it and staying in front of them by offering a great customer
experience you increase the likelihood of people working with you again and wanting
to return to either get your service or get your product another time.  

Tip #2 – Stay On Their Radar:  

97% of people that go to your website or interact with your brand for the first time don’t convert.  

It doesn’t mean they aren’t the right customer or they’re not a good fit for your business.  

It just means they’re in a different spot in the sale funnel.  

Maybe they’re just researching.  

They’re comparing price shopping.  

It doesn’t mean they’re a bad customer for you.  

If you follow up with them and stay on their radar using retargeting ads or any of the
other myriad of marketing opportunities out there, you’re able to keep that top of mind
awareness and you’re able to follow the Marketing Law of 7. 

Which means that a consumer needs to see or interact with your brand at least 7 times
before they decide to make a decision as to whether or not they’re going to work with
you in the future. 

Tip #3 – Automate Your Processes:  

Use CRM and use email automation.  

The last thing you want to do is spend all this time money and energy in driving people
to your website, getting them to fill out a lead form, or maybe they made a purchase,
and then they completely fall off your radar, and you never talk to them again!  

All you need to do is set up some automated process with email automation and with CRM
lists, and you can develop a funnel to continue nurturing these customers, so they come back
to you when it’s time for their next service or product.  

There are a lot of different tools and systems you can use for this, depending on your budget
or needs. Tools like Active Campaign, MailChimp, Drip,
etc. are all specialized in helping you not lose touch with your customers. Even Hubspot offers email marketing for free
now in their starters suite. 

Tip #4 – Ask For Referrals:  

If you aren’t asking for referrals, you’re relying on luck.  You need to give your customers an opportunity
to brag about you.  They’ve already paid you.  They’ve already taken that risk.  

Now you’ve developed a trust relationship with them so give them an opportunity and
an incentive to brag about their decision to their friends and their family.  

It’s a great way to generate new leads.  

It’s a great way to get your brand name out there at minimal cost to you.  

And you’re also able to stay in touch with the customer you’ve already worked with and
all of their friends and family, so you can utilize them as another opportunity to drive
more business and return business back to your company.  

Tip #5 is to thank them and follow up  

You need to say thank you!  

Say please, say thank you, appreciate the fact that they’re spending their hard-earned
money with you and recognize that.  

This is also a fantastic time to ask them to leave you a review!  

Reviews are incredibly powerful. It’s an opportunity for you to develop and
maintain your online reputation.  

So if you provide excellent customer service and you follow these tips, thank the customer
after the service or the product has been delivered – ask them for a review.  

It’s a great way to grow your business and keep people coming back to you.  

Finally, remember it costs five times more to generate a new customer than it does to
keep an existing customer.  

If you follow these tips and provide exceptional service and great products to your customers,
they’ll keep working with you!  

They’ll come back, they’ll become a lifetime customer, and they’ll refer their friends
and family, resulting in a net growth for you and your business. 

That’s it for today. 

Thank you for watching and if you’re struggling with calculating your CLV or if you want more
examples to increase your CLV, be sure to check an even more in-depth article at usergrowth.io

 If you also have any other questions, you
can leave a comment below, we’ll answer them. 

And of course please like the video, share it, comment anything you can do to help spread
the word. 

Thanks for watching and have a great day!

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