Transcript

Do you know how much each customer is really worth to your business over their lifetime? Most marketers don't. In today's video, I'm gonna break down customer lifetime value, why it's so important, how to calculate it, and how you can use it to grow your business. Now, understanding CLV can actually help your business make smarter decisions about marketing retention strategies and overall profitability, and you'll learn more in this video. Now, if you want more actionable marketing tips like this before we dive in, make sure you subscribe and hit that like button slash notification bell so you don't miss out. So let's dive in.

Now the goal of this video is to explain the concept of customer lifetime value, how we're going to calculate it and why it's essential for businesses to focus on increasing CLV for long-term profitability. Now, as you can see, I'll share my screen here. We're going to go through some standard marketing tips here that's going to help you in the long run. Now, who am I? My name is Caleb Roach. I have a great quote that I love. Good marketing makes the company look smart. Great marketing makes the customer feel smart.

my marketing experiences. I'm the founder and marketing strategist at Club Creative, global marketing consulting firm, formerly worked with Inspire Brands. I have both a BBA of marketing and an MBA in marketing. So I like to have the real world experience plus the educational side. Now, when we talk about customer lifetime value, I think it's really important for us to define what is CLV or customer lifetime value. Customer lifetime value is the total revenue that you can expect a single customer to generate for your business.

over the entire duration of the relationship with you. So why does this matter? Well, it helps businesses understand how much they should be spending on acquiring and retaining customers, which in the long run, it really makes a big difference. And we'll get into that a little bit further. Now, for example, if you're not as familiar with the term of CLV, the best example that we can put together is a customer comes and buys from you once might generate maybe $50, let's say.

but a loyal customer who makes multiple purchases over a year could probably be worth maybe 500, 750, a thousand, obviously dependent on the different formulas, what services you offer, things like that. Now, when we actually get into the importance of customer lifetime value, there's a couple of things that we'd like to make note here. So first, knowing your CLV helps you understand A, how much to spend on customer acquisition without cutting into profits, two,

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the value of focusing on customer attention and loyalty, and three, long-term profitability rather than your short-term sales. Now, a tip here is obviously high CLV customers often become brand advocates, referring others to your business, which ultimately further increases their value. Now, something that we're not going to touch on on this video, but something further to think about when you're thinking about customer lifetime value is when you are calculating this number.

The thing that you can't take into consideration is based on the amount of referrals that you've received from someone that could technically be considered as customer lifetime value because they are referring individuals to your business. Now we're going to go through some calculations here. And one thing you could do to consider is look at the amount of referrals on average you receive from certain customers. You could break it out by sub segments and look at how much volume are you generating from those customers.

And you could include in your equations if you wanted to as referrals included in someone's lifetime value. Now where that gets dangerous is when you look at a customer's lifetime value and you look at 1500 plus another 1500 for referrals, you can't calculate $3,000 plus another 1500 from someone spending something else from you because obviously that's two of the same revenue streams coming together.

Now, how do we actually calculate customer lifetime value? Now, we have two different formulas here that we'll discuss. One is gonna be a basic CLV formula, the second being an advanced CLV formula. Now, at its core, the most basic formula for customer lifetime value is we look at the average purchase value times the number of purchases per year times the average customer lifespan. So pretty simple math here. It's gonna be three different numbers.

Obviously there can be different variables when we look at different businesses. But in short, the most basic form is if your customer spends $100 per purchase and you know that they buy three times per year and they stay with your business on average for five years, the CLV here is going to be $100 times three times five, three times per year, five years. It's going to be $1,500 over the course of that timeframe. Now, when we look at accounting principles,

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When we look at budgeting for ads, things like that as a business from a business perspective, obviously you can break this down over a yearly term. So, you know, we considered five years here, but you could look at how much they spend per year and use that for decision-making across ad spend, across budgeting, things like that. You can look at it from a three, a five or a 10 year perspective is what we recommend. Now the pro tip here is we got to focus on both increasing the average purchase value.

and obviously extending the customer lifespan to boost CLV. Obviously the bottom line here is we've got to look at how do we increase this $100 per purchase, then included in that is how do we increase buying frequency per year? And if we're looking at it from a three, five, 10 year perspective, how do we find ways to help them stay with our business longer than five years? How do we make them stay with our business for 10 years? Because

Obviously the math starts to get a little bit more interesting here when we look at $100 increases to $250 purchase frequency goes up four times instead of three times. And this is 10 years. Now we're looking at the average lifetime value of 250 times four times 10, which is obviously going to be $10,000. So obviously there's a lot of math here, a lot of different variables. But if you look at increasing $250 from a hundred dollars,

that in four times instead of three times, that overall that increases our amount of revenue generated from $300 to $1,000 per year, which obviously is a massive difference. Now, sometimes we're looking at businesses that might have a little bit more complex customer behaviors. So we've put together a little bit more of an advanced CLV formula for you to calculate if you have more of a complex business over just

amount of frequency and amount of revenue times the lifetime of the business. So right here, what we're looking at is we'll look at for the advanced CLP formula, average purchase volume times purchase frequency rate divided by customer churn rate. Now, this might seem a little complicated, but it really isn't when you look at the long run. So what we're looking at is average purchase value, which is obviously the revenue generated.

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times purchase frequency rate. So if you are a monthly subscription business, if you're a quarterly subscription business, if there's a different purchase frequency rate, and then churn rate is obviously gonna be the amount of customers that leave your business, which makes a big difference. And if you're more of in a service business, obviously this is a little bit more applicable because you do have more churn rate versus more of a product business where either you have one time purchases or repeat customers. Obviously churn can be involved, but this is more a little bit more up.

applicable towards service based businesses. Now for this example, if the average purchase value is $100, the purchase frequency rate is three times per year and your average turn rate is 20%. So 20 % of your customers are leaving year over year. Your CLV would be $100 times $3. So we'd be looking at $300 divided by 0.2, which obviously leads to 1500. Obviously the numbers here are pretty similar.

But as you can see, it's a little bit more of an advanced calculation when you're looking at your customer lifetime value. Now, a pro tip here is we always advise keeping an eye on customer acquisition costs versus CLV, because as we know, if your CAC or your customer acquisition cost is close to or exceeds CLV, customer lifetime value, it's obviously time to reevaluate your strategy. Sometimes in a growth stage of a business, sometimes you are paying more for a CAC cost versus your customer lifetime value.

But if you're a little bit more of established business or your budget's a little bit tighter, obviously the most important part to optimize within the strategy is how do you lower your cat cost and how do you increase your CLV to where maybe there's a two times multiple, a four times multiple, depending on your profit margins to where you're actually making money from acquisitions online. Now, how do you calculate CLV without doing these formulas? Because as we know, we probably don't want to just be sitting here doing calculations in our head.

or on an Excel spreadsheet, things like that. Obviously Google Analytics can play a really big role in this. They can actually do all the numbers for you based on ads. Shopify Analytics, if you're utilizing some sort of e-commerce, Shopify Analytics is actually, they have a really intuitive report builder on their backend that basically has all these reports already built in. You can put in the amount of advertising spend that you're doing. If you're tracking conversions through Google Ads, it actually will report back to each other.

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And obviously there's different CRM softwares that you can actually track and analyze customer behavior, calculate CLV more accurately, which is really important.

Now, why is this important? Obviously, there's a lot of different pieces that it's important to look at. So when we're looking at optimizing customer acquisition costs, one of the things that we're looking at doing is we want to understand how does your CLV help you make better decisions about how you should spend on acquiring new customers? Now, if we think about this, if your CLV is $1,000, you can obviously afford to spend more on acquiring new customers. As you know, the long-term returns justify the initial investment.

One of the things here to think about is how do we compare your CLV to your cat costs, your customer acquisition costs to ensure your business remains profitable? Now, the second part within why CLV is a powerful metric for marketers is you can actually focus on customer retention. Obviously, increasing CLV focuses on keeping customers longer rather than just acquiring new customers. So as we know, retaining customers is five to seven times cheaper than acquiring new ones, which is a shocking but really relevant statistic here.

Now, if we think about an example here, we're looking at a subscription service like Netflix, where they're heavily on retaining customers throughout the personalized recommendations, which obviously leads to high CLV. Now, the third part, in my opinion, the most important part of utilizing CLV within your business is you can have a better allocation of marketing resources. It allows you to prioritize marketing efforts towards high CLV customers.

Obviously these are your loyal customers who generate the most revenue over time. And a tip here is you can segment your customer base, develop specific marketing plans for higher value customers. So maybe you have a loyalty program, maybe give them VIP treatment, things like that. Now let's talk a little bit more about how do we increase customer lifetime value.

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share the screen here again. So when we're looking at it, there's a couple of different tips here that we have. We have about five different tips that we're looking at. Now, when we're looking at our first tip, personalizing the customer experience, in our opinion, one of the biggest things that you can use customer lifetime value and you can use to increase is how do we use customer data to personalize interactions, emails and offers? Obviously we know people are more likely to stay with brands that understand their preferences. Now, as an example, we're looking at Amazon here.

As we know, they're really incredible at personalizing product recommendations based on browsing and purchasing history. And as we know, it keeps customers engaged and increases repeat purchases. Now we can use tools like HubSpot, Klaviyo for personalized email marketing campaigns. There's really great tools out there like MailChimp. Obviously there's way too many tools that we could talk about in this, but we've seen really good things from HubSpot and Klaviyo here. Now the second part that you can do to increase customer lifetime value is

improving your customer service. Now, if we think about data again, how do we increase customer lifetime value through excellent customer service? What we do is we increase satisfaction, which makes customers more likely to stick around and spend more. As we know, if you have very experienced with Zappos, they have an incredible talk to your customer support. They provide real-time support. Usually it's through chat, usually it's through phone. Everyone that you talk to is very knowledgeable, very nice, very friendly, and very easy to work with.

Obviously this leads to a very strong customer loyalty and ultimately a higher CLV. Now, if you have a support team, we always recommend training them to resolve issues quickly, offer that personalized touch. Now, the third thing that you can do here to increase customer lifetime value is implementing a loyalty rewards program. Sometimes this is easier said than done. Again, if you're in more of a product business, it's a little bit easier. If you're more retail, if you're in service, it gets a little bit more complicated. There's less tangible value that you can offer.

but it becomes more non-changeable of how do you increase retention across taking clients to dinner, things like that. Now, if we're talking more retail or product-based, usually we're looking at how do we reward customers for the repeat business with either points, discounts, exclusive offers. Best example here would be Starbucks loyalty program. As we know, they have stars that you can get for purchasing products, purchasing coffees, and it encourages customers to visit more frequently by offering points for every purchase.

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which is obviously redeemable for free products. As you can see, probably nowadays, most businesses are using this, Chick-fil-A, Wendy's, mean, really any fast food restaurant, a lot of retail businesses, shopping, e-commerce, they're all doing it. And as we know, there's a big value prop here where if you create tier-brief rewards, it actually can encourage repeat product purchases and increase in customer engagement. And as we know, it might drive a little bit higher engagement across purchase frequency.

and purchase volume, which is really important from that perspective. Now, the fourth thing that we're looking at is how do we upsell and cross sell strategically? Offer related or complimentary products to customers to increase the average purchase value. Obviously, we've seen that Apple excels extremely well at this by offering accessories. You go in, you purchase a MacBook, you purchase an iMac. What are they trying to upsell you on? AirPods, Apple Watch. Same thing can be said across your iPhone line. Now,

What's amazing about this is these are all complimentary products to their main offerings. So not only does it not alienate your customers, it actually builds more value because they're further in the ecosystem, which is very important. Now you can do this through automation to suggest related products at checkout, follow up emails. Obviously it depends on what kind of product you're selling, what type of ecosystem you're building, but there's some really creative ways that you can do this, which we'll dive in further and further videos. Now, the last thing that you can do here is

you can encourage referrals. lot of businesses have gotten really great at this. As we know, happy customers will refer others to your business, which increases your revenue without additional acquisition cost. Now, a perfect example here is Dropbox. I don't know how many of you use it. We use it. We've seen really great results from it. What's amazing about it is they've actually grown their customer base by offering extra storage to customers who refer friends. This is a great opportunity for you to not only reward referrals, but encourage them. Because as you know,

creating a referral program that incentivizes both the referrer and referred increases customer lifetime value. Now, in summary, what we've learned here is that customer lifetime value is one of the most important powerful metrics for marketers. It helps you optimize customer acquisition costs, prioritize retention and build a much more profitable business. Now, it's important to remember all of the formulas, key strategies that we talked about in this video, because as you know, improving customer service, implementing loyalty programs and upselling.

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all relate to customer lifetime value. Now it's your turn. Go calculate your customer lifetime value and start thinking about how you can use this metric to grow your business. And if you found this video helpful, please give it a thumbs up. Don't forget to subscribe for more marketing tips and let me know in the comments, what's your strategy for increasing customer loyalty?