Calculating Customer Lifetime Value: Everything You Should Know

Struggling to calculate customer lifetime value? You’ve come to the right place.

Unsurprisingly, existing customers have 31 percent more customer order value than new customers. When loyal customers keep buying from you, their purchases can really add up over time. This total amount is known as their customer lifetime value.

This metric compares how much money a customer brings in to how long the company expects them to stay a customer.

So, let's explore customer lifetime value calculation more.

What is Customer Lifetime Value?

Wondering what customer lifetime value is? It is the total profit a company expects from a customer. It looks at the entire time a customer does business with the company. It’s not just about single purchases and considers how much it costs to acquire the customer. It also considers ongoing sales and marketing costs. CLV includes the cost of running the business and making products as well.

Here's what you need to know while calculating customer lifetime value.

Customer Lifetime Value Models

There can be two kinds of customer lifetime value models. Choosing one of these models over the other will also produce different results. So, let's explore the different kinds of lifetime value models.

1. Predictive Model

In this model, a business considers the purchasing behaviors of its new and existing customers to forecast their future lifetime value. They use a combination of machine learning and regression to do this.

This predictive model can benefit businesses by identifying the most valuable customers. Moreover, it identifies the products and services responsible for driving revenue, which helps companies improve their customer retention strategies.

2. Historical Model

The historical model of customer lifetime value considers past data of consumers. This model is highly beneficial for businesses that interact with their customers for a set period. Still, it has a few drawbacks.

The model doesn't consider whether a business's existing customers will churn in the future, resulting in inaccurate figures.

Calculating Customer Lifetime Value

Now that we know the basics, let’s learn how to calculate customer lifetime value.

Let’s examine the consideration when calculating customer lifetime value. Each component is crucial in understanding how much value a customer brings over time.

1. Customer Value

To figure out the total value of your customers, start by calculating two key values

• Average Purchase Value:

  How much a customer typically spends on a single order

• Average Purchase Frequency:

  How often they make a purchase

Once you have those, it’s easy. Just multiply the average purchase value by the average purchase frequency. This gives you a solid idea of how much value a customer brings to your business.

2. Average Purchase Value

To determine your business's average purchase value, look at your total revenue for a specific period. Then, divide that total by the number of purchases made during that period. It gives you a clear picture of how much, on average, each customer spends per order.

3. Average Customer Lifespan

Every business must retain its customers to be successful. The longer a customer is retained, the more value they bring over time.

Here's how you calculate the average customer lifespan.

How to Increase Customer Lifetime Value

How can a company make customers happier and boost their lifetime value? It starts by focusing on making customer communication personal and relevant. This approach will impress customers and improve their experience.

Here are expert tips for you to improve customer lifetime value.

1. Expansion Revenue

As you know, expansion revenue means selling more products to your customers. Here's how you can do it.

• Upselling:

  You can encourage customers to upgrade their subscription plans. This is an excellent way to improve the customer's lifetime value.

• Cross-selling:

  Find complementary products that your existing users might like. It's another important way to improve their lifetime value.

• Add-ons:

  To offer your customers more features in existing plans, you can give them add-ons.

2. Customer Loyalty Program

A customer Loyalty program is an efficient way to reward your users for their engagement. It might make you think about how it would improve lifetime value.

Rewarding your users makes them think you value them and are more likely to engage.

With the power of AI technology, you can now ensure that the customer loyalty program resonates with every customer. For instance, you can use AI to segment your customers and find what each segment is looking for. By making sure that the loyalty program adapts to the interests of these individual segments, you can engage and retain them.

Moreover, a rewards program helps you to improve the lifetime value of all customers in different segments and reduce the churn rate.

3. Personalize The User Experience

Did you know that 71 percent of customers expect some level of personalization from businesses? Furthermore, 76 percent of consumers get frustrated without personalization in their interactions with a business.

So, personalizing the user experience has become more important than ever. It helps you engage your existing customers and retain them over time. Moreover, it is a very important factor in building customer loyalty. There is no need to explain that loyal customers have high lifetime value and attract new customers to your business.

4. Referral Program

Isn't a referral program all about existing customers inviting new customers to try a product? Then how is it even related to improving customer lifetime value?

Do you know that when customers refer their friends to your business, they are more likely to stay with you? Moreover, when users get to know your product from a friend, they have a better opinion. So eventually, they would have a good lifetime value as well.

Maximize Customer Lifetime Value With Quest’s AI Solutions

The above section will help you with calculating customer lifetime value. Moreover, we have explored ways to improve it. Still looking for better ways to maximize the lifetime value? Then, try Quest Labs AI’s exceptional solutions.

• Onboarding Optimization:

  Engage your users from their first interaction by asking them the right questions and introducing relevant features.

• Gamified Engagement:

  Engage and excite users through challenges, leaderboards, and other gamified elements.

• Gather User Feedback:

  Ask your users what they think of your app and let them see how you value them by implementing it.

• AI User Segmentation:

  Segment your users based on their behavior and preferences and offer them the right rewards and offers.

That’s not all! We have more in stock for you to engage and excite your customers. Want to know more? Book a free demo and talk to us.

FAQs

1. How to calculate lifetime value of a customer?

Here’s the formula for customer lifetime value calculation.

CLV = Customer Value X Average Customer Lifespan

2. What three components are taken into consideration when calculating customer lifetime value?

The three factors to consider while calculating the customer lifetime value are:

1. Average purchase value of customer
2. Average customer lifespan
3. Average customer purchase frequency.

3. What are the 4 types of customer value?

Here are the four types of customer value.

• Economic value
• Emotional value
• Functional value
• Social value