Learn how you can Unlock Limitless Customer Lifetime Value with CleverTap’s All-in-One Customer Engagement Platform.
What if we told you that there’s one sure-fire way to improve your brand’s profitability (by up to 25% or more!) and potentially increase profits — by up to 95%?
The tip? Simply increase your retention by 5%.
As you probably know, it costs six-to-seven-times more to acquire a new customer than it does to retain current customers.
And the key way to identify which customers to focus your retention efforts on is to estimate customer lifetime value (CLV).
Customer lifetime value represents how much a customer is expected to spend with your company from their first purchase to their last. It helps you identify your most valuable customers so you can optimize your marketing campaigns to target these customers and enhance their satisfaction and retention — and your ROI.
This business metric can drive everything from your marketing strategy, to sales techniques, to the products and/or services you develop. In short, it’s one of the most important metrics to understand and to increase.
Depending upon the data available to you, there are many formulas for measuring CLV. Measuring CLV by using segment analytics involves segregating customers into groups based on their common characteristics, traits, and/or behaviors. With this method, brands can calculate CLV for diverse categories of customers and compare their value to the business.
Here’s how to measure CLV with segment analytics in five steps:
First, define customer segments based on criteria such as demographics, location, frequency and value of purchase, product preferences, and more. Using a customer engagement tool like CleverTap allows brands to gather and analyze data about customers and how they interact with your brand across multiple channels.
Segment customers by these attributes:
Create more complex and diverse segments by combining multiple criteria:
The number and type of segments depend on your end goal and the data available. You should aim to create segments that are:
To calculate the average revenue per customer, divide the total revenue generated by each segment by the number of customers in that particular segment.
For example, a particular segment has 100 customers who purchase from a brand once a month and generate $20,000 in revenue. In this case, the average revenue per customer is $20,000 divided by 100, or $200. This is how much each customer in that segment contributes each month, on average.
To work out the average lifespan of customers in each segment, simply estimate how long a customer stays with your business before they stop making purchases.
For example, suppose there’s a segment of customers who purchase once every month and these customers typically continue doing so for a span of two years. In this case, the average lifespan of this segment of customers is 24 months.
Marketing teams can also leverage past data or refer to industry benchmarks to estimate this number.
Multiplying the average revenue generated per customer by the average lifetime of a customer for individual segments will determine the CLV for every segment, and will predict how much each customer is worth to you over their entire lifespan.
For example, suppose there’s a segment of customers who buy once every month, generating $100 in revenue per customer, and this segment stays with the brand for 24 months. In this case, the CLV for that segment is $100 x 24 = $2,400.
Below are other ways to calculate CLV:
This is the key to the whole process. It’s what steps 1-4 are building up to. By comparing the CLV of different segments, you can identify your most valuable customers. Then, target them with personalized marketing campaigns. This will ensure you’re optimizing your marketing budget to boost customer satisfaction and increase revenue.
For example, as a marketer you can:
All KPIs are certainly important. But Customer Lifetime Value may be the most critical metric to track when trying to thrive in a dynamic, highly competitive market. CLV helps you focus your efforts and resources on your highest-value customers.
By leveraging segment analytics to measure CLV, you’ll gain deeper analytical insights into your customer base, better tailor your marketing efforts, and make data-backed decisions that will help drive long-term profit.