Calculate Customer Lifetime Value

Calculate Customer Lifetime Value (CLV) and you have one of the most important metrics to measure for any growing company. It shows how long it takes to recoup the investment to acquire a new customer, the value of a customer relationship and provides a prediction of future profitability and revenue for forecasting.

Here are Customer Lifetime Values for some companies you know.

• AMAZON PRIME: $1,340
• AMAZON KINDLE: $1,233
• AMAZON: $790
• NETFLIX: $291
• STARBUCKS: $14,099

How to figure it out for your company? Take these 6 straightforward steps to calculate Customer Lifetime Value (CLV).

Step #1: Start with Annual Customer Value

Start by dividing your company’s total revenue over a specific time period (usually one year) by the number of purchases over the course of that same time period. You can also segment your customer base by best, good and bad customers. So you have Annual Customer Value by segment should you want to reward the best customers with a loyalty program.

Step #2: Identify the Life Span of the customer

What is the Life Span for your customers? For example, Starbucks is 20 years. As a result of this Life Span, Starbucks’ Customer Lifetime Value is high. Life Span is the average time the customers used in Step #1 stay with you. With Annual Customer Value and Life Span, you’ve established your foundation for Customer Lifetime Value. Now, it’s time to start sharpening the number.

Step #3: Apply Customer Retention Rates

To calculate Customer Retention Rate, you need to know three things.

1. Number of customers at the end of a period (E)
2. Number of new customers acquired during that period (N)
3. Number of customers at the start of that period (S)

We are interested in the number of customers remaining at the end of the period without counting the number of new customers acquired. Remaining customers can be calculated by subtracting N from E. To calculate the percentage, we divide that number by the total number of customers at the start and multiply by 100.

Customer Retention Rate = ((E-N)/S)*100

As an example, the Customer Retention Rate for Amazon Prime year over year is 90%.

This formula also takes into account businesses that have churn or cannibalization influencing retention rates.

Step #4: Determine Gross Margin per customer to calculate Customer Lifetime Value

This is how much profit each customer provides during their lifespan. Gross Margin is determined by total revenue minus the direct costs of producing the goods as well as investments into services for customer acquisition.

Step #5: Know the rate of discount

The Rate Of Discount = The interest rate used for calculating the present value of future cash flow. This number is usually between 8% and 15%. This value assumes prices aren’t going to increase in the immediate future. You can always look at high/low scenarios. However, a safe value to apply if you are unsure is 10%

Step #6: Calculate Customer Lifetime Value

Now, you’re ready to go. Annual Customer Value X Life Span X Retention Rate X % of Gross Margin X Rate of Discount = Customer Lifetime. Because you know the steps to get there, you know how much your customers are worth, their value in the future and your company’s ability to grow. That’s why it’s one of the metrics that matter for any business.

These steps follow the formula used by Neil Patel. Thanks, Neil for helping us better understand Customer Lifetime Value.

Do these steps help you with CLV for your company?

Customer Lifetime Value (CLV) is a prediction of the net profit attributed to the future relationship with a customer.

Peter Drucker said: “The purpose of a business is to create and keep a customer.” Which pretty much sums up the value of Customer Lifetime Value (CLV) .

CLV helps make important business decisions about sales, marketing, product development, and customer support. For example:

• Marketing: How much should I spend to acquire a customer?
• Product: How can I offer products and services tailored for my best customers?
• Customer Support: How much should I spend to service and retain a customer?
• Sales: What types of customers should sales reps spend the most time on trying to acquire?

To calculate Customer Lifetime Value, here is how to do it.

If you want examples of brands that are making the most of it, here are 9 inspiring case studies of Customer Lifetime Value (CLV).

1. AMAZON: Consumer Intelligence Research Partners estimates that Amazon Kindle owners spend approximately $1,233 per year buying stuff from Amazon, compared to $790 per year for other customers. So Amazon pays close attention to Customer Lifetime Value (CLV). Amazon Prime has been developed to enable Amazon to efficiently compete on price and to increase customer lifetime value. According to a 2013 study by the Consumer Intelligence Research Partners, Amazon Prime members spend $1,340 annually. And that was 3 year ago. It’s more now. By applying Customer Lifestyle Value (CLV) to the development of Amazon Prime, Amazon knows how to get the most out of their most profitable customer segments.
2. BONOBOS: Is a leading e-commerce driven men’s apparel brand focused on delivering great fit, a fun approach to style, and superb customer experience. Bonobos has always been a data-driven, customer-focused retailer. With Guideshops, Bonobos has service-oriented e-commerce stores that enable men to try on Bonobos clothing in person before ordering online. Bonobos discovers that Guideshops bring in customers with the highest lifetime value across all of its marketing channels. Insights into which channels are attracting Bonobos’ highest-value shoppers has helped Bonobos increase the predicted lifetime value of its new customers by 20%.
3. CROCS: has always had a data-driven, customer-centric approach to marketing. When the marketing team is given a mandate to transform Crocs’ online business by becoming less reliant on promotions and discounts, the team is excited by the opportunity to improve Crocs’ profitability. The team tests to optimize promotions aimed at customers who are predicted to churn, and expands programs to coordinate a “no discount” experience across site, email and display for customers with the lowest price sensitivity. Crocs realizes 10X and 2X lift in revenue.
4. HEAR AND PLAY MUSIC: A provider of music lesson products, uses automated lead nurturing and scoring to turn prospects into customers and repeat customers. Many of the company’s products cost less than $100. With automated messages that have a personalized tone to high value prospect, the company has seen: 1) 416% increase in Customer Lifetime Value, 2) 67% increase in click through rate from the best prospects (increased from 24.73% to 41.28% for subscribers with the highest lead scores) and 3) 18.4% improvement in lead-to-purchase time.
5. KIMBERLY-CLARK: According to Nielsen, the typical family spends over $1,000 on diapers and baby wipes during the two-and-a-half years their children are in diapers. A Nielsen study was able to quantify the dollar value of key consumer segments, the critical nature of brand selection at various points in the consumer lifecycle and distinct differences in channel choices through key points in the baby care lifecycle.  Kimberly-Clark has a clearer picture of its target market and where its greatest marketing and promotional opportunities exist to extend and expand their market share. “Nielsen’s lifetime.
6. NETFLIX: An average Netflix subscriber stays on board for 25 months. According to Netflix, the lifetime value of a Netflix customer is $291.25. Netflix knows that customers are impatient and some customers cancel because they don’t like waiting for movies to arrive in the mail. Due to this they’ve added a feature where you can stream movies on the web, which not only satisfies your movie urge, but it keeps you busy while you are waiting. By tracking these stats and behavior, Netflix has reduced their churn to 4%.
7. STARBUCKS: One of the most effective ways to boost Customer Lifetime Value (CLV) is to increase customer satisfaction. Bain & Co has found a 5% increase in customer satisfaction can increase by 25% to 95%.  The same study shows it costs 6 to 7 times more to acquire a new customer than keep an existing one. Starbucks’ customer satisfaction has been reported as high as 89%. Due to high customer satisfaction, Starbucks’ Customer Lifetime Value has been calculated at $14,099.
8. U.S. AUTO PARTS:  Realizes the competitive advantage of loyalty and decided to invest. The company debuted the Auto Parts Warehouse loyalty program, known as APW Rewards. U.S. Auto Parts began to leverage capabilities such as increased rewards for high-margin products, personalized post-purchase enrollment offers, a status tier, and triggered email campaigns based off of a person’s repurchase history to maximize customer lifetime value. U.S. Auto parts increased its spend per member by 20%, its repurchase rate by 14%, and its enrollment rate by 45% after updating the loyalty program of its flagship brand,
9. ZAPPOS: Has found people who regularly return items can be some of your best customers. It says that clients buying its most expensive shoes have a 50% return rate. Placing a priority on Customer Lifetime Value, Zappos has identified their best customers have the highest returns rates. They are also the ones that spend the most money and their most profitable customers. That’s why Zappos has a 365-day returns policy, free two-way shipping and doesn’t charge for returns.

Do the way these companies pay attention to Customer Lifetime Value inspire you with ideas for your company. Do you want to learn more about making the most of out of CLV.

• 5% increase in customer retention increases profits by 25% to 95% (Harvard Business Review)
• 6-7x more costly to acquire a new customer than retain a current one (Bain & Co.)
• Just 42% of companies are able to measure Customer Lifetime Value (Econsultancy)

There are many reason why customer retention is important. Perhaps most important is the value of retained customers over time.

Customer Lifetime Value is the dollar value of a customer relationship based on the present value of the projected future cash flows from the relationship.

It pays to calculate Customer Lifetime Value. It’s one of the most important metrics for a business.

To show why, here are 12 big business benefits of Customer Lifetime Value.

1. LARGEST BUSINESS ASSET: Customer Lifetime Value provides an exact figure for the company’s largest asset. The calculations enables you to follow the progress over time and to intervene if events start moving in the wrong direction.
2. CUSTOMER SEGMENTATION: Customer Lifetime Value enables your business to classify different customer groups and different potential customer groups by long term profitability. So you can decide whether it’s worth it to change market strategy or not.
3. EARLY WARNING SIGNS: Customer Lifetime Value can be used as an early warning system to detect defection rates. It identifies in which segments the problem originates so actions can be taken to correct the cause.
4. COMPLAINT MANAGEMENT: If a customer complains about a serious problem, Customer Lifetime Value can help front-line employees decide what action to take immediately and how much to invest to solve the problem.
5. WIN-BACK CUSTOMERS: A customer that a company wins back has a different Customer Lifetime Value before and after recovery (win-back). Often, second CLV is better than the first CLV.
6. UP-SELL AND CROSS-SELL: Two fundamental tactics in any marketing program are to up-sell and cross-sell. But which one should to do? When? And to what segment? Customer Lifetime Value can give you a good idea of the return to expect to guide decisions and investments on up-sell and cross-sell.
7. AUTOMATE INTERNAL PROCESSES: Ask a company what keeps them from maintaining better customer relationships, and their response will probably include something along the lines of “we don’t have enough time,” or “we’re too busy with daily tasks and processes.” Knowing Customer Lifetime Value can help a company determine if investments into Marketing Automation software are worthwhile.
8. BRAND LOYALTY: Products and services may be easy for competitors to copy, but a company that is good at creating customer loyalty is less vulnerable to attacks from competitors. Loyalty is much more difficult to copy.
9. BALANCE SHORT TERM RESULTS AND LONG-TERM GOALS: Customer Lifetime Value enables better decision making when having to weigh the competing needs of short-term profitability and longer term goals.
10. QUANTIFY CUSTOMER SATISFACTION: Many businesses rely on a customer satisfaction scores to guide interactions and explain business results. Customer Lifetime Value puts an amount to the increase or decrease the customer satisfaction scores represents.
11. LEAD GENERATION: Most CMOs really don’t know and even fewer CEOs know “what’s a lead worth”? When you know Customer Lifetime Value, you understand your lead-to-customer conversion rate and exactly how much a lead is worth. And how much you should be willing to spend on new leads.
12. RETURN ON INVESTMENT (ROI): Any company has only limited resources. It is natural to want to use them for customers that bring them maximum profits. If you know the cumulative cash flow a particular customer, Customer Lifetime Value helps determine how much should go into retaining a customer to maximize ROI.

These benefits show just how valuable the calculation of Customer Lifetime Value can be. But, in the end, it is a calculation. To put the business building benefits of Customer Lifetime Value to work, people have to take action.

Do these benefits prove the value of Customer Lifetime Value to you. How would you put Customer Lifetime Value to work on your business? Does your company help calculating Customer Lifetime Value?