Customer Lifetime Value (CLV)

Understanding it and ways to improve it

May 03, 2023

This is the second part of a previous post I wrote called Understanding Customer Acquisition Cost (CAC): Often overlooked and misunderstood. If you haven’t already read it, I suggest you start with that article and then come back to this one.

Once you understand Customer Acquisitions Costs (CAC). The next thing to understand is what’s called Customer Lifetime Value (CLV). CLV is the average revenue a single customer will generate throughout their lifetime as a customer of a business. This is important as it allows a business to plan how much it can plan to earn from the average customer over the course of their relationship.

The CLV of a customer is connected to both a customer’s satisfaction with a product or service and a company’s ability to retain those customers. Calculating this gives an indication on how your servicing and satisfaction of your clients is going. If customers continue to purchase from you, that’s a great sign and that means the less you need to spend on your Customer Acquisition Cost (CAC).

This allows you to plan on what the average customer will spend in their lifetime. If customers make more than one purchase over the lifetime with your company, this increases the lifetime value of a customer. It’s a tool that allows to make more informed decisions about marketing strategies, pricing and customer retention.

Some important figures that you’ll need to know in determining this are the following;

Average Order or Sale Value: This is the average amount of money that a customer spends per order or sale.
Number of Repeat Transactions: This is the number of times a customer is likely to make a purchase over the lifetime of their relationship with a business.
Average Customer Lifespan: This is the average length of time that a customer remains a continued customer.

For example, let’s say a customer’s average order value is $100, they’re likely to make ten purchases over the course of their relationship with the business and the average customer lifepsan is three years. The CLV would be:

$100 x 10 x 3 = $3,000

That means the total revenue this customer would likely generate over their customer lifespan is $3,000. Another way to look at it then is to take out the average associated costs per customer, or your CAC costs. See the example below.

So if it costs $1,000 in CAC to get that $3,000 in CLV, your CAC:CLV ratio is 3:1. The rule of thumb is to usually have a ratio of at least 3:1. Every industry has a different measurement. The amount of churn or retention rate can vary widely. This just gives a tool to apply to your business or sales team.

Once you’re aware of the CLV of the average customer, it allows you to then look back at your CAC and see if it’s in healthy shape or if changes need to be made. CAC gives you a short term view like the cost to acquire a new customer, while CLV gives you a long term view on what return the CAC investment will have.

Being aware and having an understanding of the value a customer will bring over the course of a lifetime allows a business to make the proper strategic decision to grow and succeed over the long term.

Ways to Improve CLV

Whether someone is making a one-time sale to a customer or they’re an ongoing monthly or yearly purchaser of your product or service, there are ways to improve the stickiness of the relationship. You want repeat customers who continue to come back for your product or service.

Upsell and Cross-sell: Upselling means to sell more features or product extensions to existing customers. Cross-selling means to sell other related products in addition to products they’ve already purchased. This leads to longer relationships and it’s less expensive to sell to an existing customer than to a new customer.

Keep in Contact: Do you get a customer’s name, address, email and phone number? Do you get any of these? Having this information allows for you to continue to reach out and make sure they don’t forget about you. This increases the upsell and cross-sell opportunities. Whenever they think of the product or service that you're selling, you want them to think of you. You achieve this by constantly keeping in some form of contact with them.

Personal Touches: Reaching out in personalized ways increases the relationship with a customer and the likelihood that they’ll continue to be a customer moving forward. These are a few ways of doing that, which I’ve written about in the past.

The Coffee Table ☕

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On Odd Lots with Joe Weisenthal and Tracy Alloway, they discussed the looming white oak shortage that could disrupt the future of the thriving bourbon industry. I was unaware of this but found their interview with a Penn State forestry professor to be very interesting and informative. If you didn’t know, all bourbon has to be aged in new white oak barrels.

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