Today, businesses are continuously searching for more ways to make the most out of their money.

Optimizing spending and earnings have been at the center of businesses.

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One of the important concepts driving business growth is the customer lifetime value.

In this article, we will learn more about how to calculate customer lifetime value and how you can increase it.

So, what is customer lifetime value?

Customer lifetime value is an estimation of the total value that your customer brings in throughout their customer lifecycle.

The term customer lifetime value is also abbreviated as CLV or CLTV.

In this concept, it puts the spotlight on individual customers.

In fact, it provides businesses with an opportunity to measure the contribution of each customer.

From here, businesses can strategize their marketing skills to fit individual customer’s needs.

Why are businesses interested in customer lifetime value?

Major corporations such as Amazon, Google, and Microsoft also utilize customer lifetime value.

The wide usage of this concept shows the importance of it in the business world.

Let’s find out why businesses are becoming interested in this concept.

· Customize marketing efforts

Any good business will store critical information about their customers.

This includes their average purchase frequency, last time they visited the store and last time they made a purchase.

For e-commerce businesses, this information is available on platforms such as Shopify and BigCommerce.

Knowing how to calculate customer lifetime value means you will know which group of customers benefit you most.

From here, you can customize your marketing efforts so that you can position your products to groups of customers that are known to purchase your items.

You can do this using platforms such as Facebook Advertisement.

It allows you to narrow down the demographics of your target consumer.

This includes age, location and interests.

· Maximize the use of technology

With the availability of technologies today, businesses shouldn’t let it sit on the sidelines.

In fact, businesses can use it to calculate customer lifetime value accurately.

More importantly, databases and software today can provide a comprehensive report about your customers.

This is much better than just manually writing them down.

The technologies of today can collect data better than humans can.

Hence, leverage the power of these technologies to make better business decisions.

· Provide a measure towards marketing efforts

When it comes to marketing, it is difficult to measure its effectiveness.

The effects of marketing are indirect.

Initially, customers are only exposed to the product.

However, the decision to purchase the product may come later on.

Hence, customer lifetime value incorporates marketing cost for every customer.

The specific approach towards customers makes it vital to strategize marketing efforts.

Also, businesses can also see if there is a return on their marketing spending.

In fact, you can learn more about how to improve your content marketing strategies effectively.

How can you calculate customer lifetime value?

There are different ways to calculate it.

For small businesses, they prefer a simplified method.

For larger corporations, more aspects are involved in the calculation.

Hence, here is a formula that can be used across different organizations.

customer lifetime value formula

For the price of item and cost of the item, these are self-explanatory.

Retention rate is simply the possibility of a customer making a repeat purchase with your business.

Meanwhile, the discount rate is the interest rate that discounts the future value of money into the present.

Also, the acquisition cost is the amount you spent on obtaining a customer.

This will vary according to the marketing channel you use.

For online platforms such as Facebook advertising, you should refer to your pay per click (PPC).

How can you increase customer lifetime value?

Now that you’ve learned about customer lifetime value, you probably want to know how you can increase it.

Here are a few steps that you can engage in.

  1. Improve the quality of customer service
  2. Encourage an innovative culture
  3. Establish a strong leadership figure
  4. Create customizable offerings for customers
  5. Encourage word of mouth marketing
  6. Improve mobile website

Without further ado, let’s learn more about how you can increase customer lifetime value.

1. Improve the quality of customer service

To increase customer lifetime value, you must give customers a compelling reason to stay loyal to your business.

In the business environment, it is easy for customers to move to another competitor.

Hence, engaging in efforts to improve the quality of customer service is imperative.

Customer service can be defined as a process in which a business will engage with customers to know what they want from the business.

More importantly, this is done because retaining a customer is far less costly than acquiring one.

However, building better relationships with customers come with its own set of challenges.

There is a major misunderstanding that customer service ends once a sale is made.

Any good business should know that customer service begins even before a sales occurs up until after the sale.

Even after a sale is made, customer service needs to cater to the customer continuously.

To understand a customer better, businesses must strive to understand the needs and wants of these customers.

Hence, the use of technology is highly important here.

The customer data which is collected will provide a closer look to the consumer preferences.

Cultural differences also matter in customer service.

Multinational corporations will find cultural differences imperative.

The social norms and beliefs highly dictate consumers expectations of a business.

Therefore, customer service teams in different countries should be aware of customer service standards in different regions.

Besides just cultural differences, there are other factors such as age and profession.

Hence, businesses need to train their customer service team to be accustomed to how they can handle different customers.

So, customer service can add value to a customer’s life, this will increase customer lifetime value.

This can manifest in the form of higher purchase frequencies and repeat purchases.

2. Encourage an innovative culture

People often think that improving customer lifetime value means increasing the frequency of purchases.

Also, some believe that increasing the price of the product can do so.

However, this is the mindset of a business thinking about short-term profitability.

To increase customer lifetime value in the long-term, businesses need to increase the level of innovation.

So, innovation can come from different areas.

Hence, businesses highly rely on the skills and creativity of the employees as well.

Businesses that want to improve the level of innovation must invest in their employees.

A good corporation that has successfully done this is Google.

By now, many already know that there are numerous benefits of working with Google.

Just pay a visit to one of their offices and you will most probably want to work there.

One of the first things you’ll notice is how Google’s working space is different from other businesses.

You will see arcades, gyms, cafes and many other social lounges.

Hence, you may be wondering why the environment is very different.

Wouldn’t this discourage employees from focusing at work?

Google believes otherwise.

These social lounges are created specifically to encourage interaction between employees.

When interacting with others, this creates an opportunity for important conversations to occur.

From these critical conversations, this fosters collaboration amongst Google’s employees.

Also, arcades and many other social benefits aim to inspire employees.

This has reaped tremendous result for the level of innovation in Google.

With a high level of innovation, businesses can increase the customer lifetime value in the long run.

Inherently, businesses need to start realizing that their workforce is an invaluable asset.

By leveraging their best assets, they can increase the customer lifetime value.

3. Establish a strong leadership figure

In the efforts to increase customer lifetime value, businesses must increase customers level of trust.

Hence, a strong leader that empowers the organization is important.

As we all know, a business has its ups and downs.

When businesses find themselves in a difficult situation, customer lifetime value may drastically decrease.

Hence, a key leadership figure can convince consumers to keep trust in the company.

The words of a powerful leader can reassure stakeholders during critical moments.

A key example of a powerful leader is Elon Musk.

His company, Tesla, came up with a revolutionary idea.

Tesla is an automotive company that produces fully electric vehicles.

The idea of an electric vehicle is nothing new.

However, Elon Musk made it possible for people to see electric vehicles as the new trend.

The sleek appeal and highly quiet driving experience using a Tesla draws a lot of prospects.

During the release of their latest Model 3, over 400,000 people placed a deposit for a pre-order.

However, things did not go as expected.

Tesla went through a production delay that caused a delay in the delivery of the vehicles.

Understandably, some of the buyers were upset.

However, Elon Musk has made it a point to address the concern by updating the production situation on his social media.

More importantly, Elon Musk always makes it a point to convince others that a revolutionary idea doesn’t always have a smooth take off.

So, Musk told his customers that they are all part of a groundbreaking idea.

If Tesla’s sales data were made public, the customer lifetime value would be high.

This is proven because Tesla still has supporters for each one of its releases despite multiple production delays.

So, businesses should establish a key figure that customers can trust in.

4. Create customizable offerings for customers

It’s no longer enough for businesses to simply improve the quality of their products and services.

Today, the wants and needs of customers are also changing.

In fact, customers prefer products and services that they can customize.

This gives them a feeling of exclusivity.

In a sense, it means that no one else has the same product as they do.

However, this poses a unique challenge for businesses.

This is because it can be difficult to set different prices for multiple choices in customization.

Despite this, customization can improve customer lifetime value.

Enabling customization sends a message to customers that the business cares about what they want.

Hence, we are increasingly seeing the trend of customization appearing in different industries.

One of the most common industries practicing customization is the beauty industry.

There are already beauty brands that allow customers to customize their foundation shade.

You can also customize your cushion powder casing.

Also, mobile data providers allow customers to customize their data plan.

Footwear brands hire professional artists to help customers customize artwork on their shoes.

Ultimately, customization can lead to a higher customer lifetime value.

This is because businesses are giving more control to customers in determining the end product they receive.

More importantly, having customization also compels customers to share the products and services.

During events where businesses can set up their pop-up booth, customization is often a great hit.

Customers are mostly compelled by the opportunity to create something exclusive.

Inherently, businesses must realize that customers like feeling special.

Also, incorporating customization improves the buying experience for customers.

Hence, this will increase the customer lifetime value.

5. Encourage word of mouth marketing

Over the years, we’ve seen how businesses engaged with different marketing strategies.

However, word of mouth marketing strategy remains one of the most powerful marketing methods.

This strategy increases referrals to the business.

In fact, this is why testimonials are powerful for business.

Also, word of mouth marketing highlights the power of relationships.

People are more likely to believe the suggestions of someone close to them.

This can be their family members, relatives, close friends or colleagues.

In fact, these recommendations may be given over dinner, barbecue session or during a brief conversation.

Ultimately, the relationships built creates trust in the recommendation given.

Despite this, it is not easy for businesses to directly cause word of mouth marketing to happen.

In fact, word of mouth marketing can happen anywhere from right after purchase up to years after a sale occurred.

Hence, there is no one direct way to make the word of mouth marketing happen.

Although so, businesses should still strive to encourage conversations to happen around their products and services.

So, create good experiences for your customers.

Ensure the products you produce are of high quality.

Recommend products that are beneficial for customers.

Reward your loyal customers.

Invite your customers to private events.

Luxury brands often personally invite their customers to a private viewing of their new products.

Customers will often share photos from the event on their social media.

Brands usually send products to social media influencers on a special occasion.

Hence, this will increase brand visibility to the influencer’s followers.

Besides influencers, you can also learn how to boost your social media marketing stategy exponentially.

Furthermore, sending items for a birthday, anniversary or important event is also a nice touch.

Therefore, make your customers feel appreciated.

They will naturally talk about your brand.

6. Improve mobile website

In a world of constantly changing trends, more people are doing transactions using their mobile phones.

In fact, social media platforms such as Facebook enabled vendors to use a feature called Facebook Shop.

Hence, customers can purchase items on Facebook without even leaving the platform.

Consumers also have an increased dependency on their mobile phones.

This means that a large portion of consumers today are mobile users.

Hence, it is important that you start learning on how you can improve your digital marketing skills.

So, businesses should always optimize the mobile view of their website.

Fast loading time for mobile websites is now increasingly important.

Loading time of 0 to 3 seconds is ideal for mobile customers.

To develop a good mobile website, put yourself in the consumer’s position.

Ask yourself, what would you want to see as consumers?

For instance, customers prefer easier navigations on the website.

Critical information such as contact form and return policies must be easily available.

Additionally, you can place the bestselling items on top of the page.

If you sell a lot of items, group similar items together.

Make the right color choices for your website.

Color psychology in marketing can make a difference in your conversion rate.

Also, you can display the latest promotion available for the website.

More importantly, incorporate a call to action into your website.

For example, show a live clock countdown to show when a sale will end.

All of these create a sense of urgency.

Meeting the needs of mobile users can translate into a higher customer lifetime value.

Keep in mind to keep track of your mobile website analytics.

So, this data can help you analyze what you did right and wrong with your business decisions.