One of the reasons loyalty programs are so popular with brands is that they enable you to increase your customer retention rate and reduce acquisition costs. Attracting new customers isn’t cheap—in fact, it’s about 25% more expensive than retaining existing clients. If you’re constantly stuck in acquisition mode, chances are your customer retention rate and lifetime value are pretty low.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) measures the value a client has for your company as of their first purchase. In other words, it’s the total amount you can expect a client to spend throughout their business relationship with you. The more a customer buys and the longer they remain a client, the greater their lifetime value.
How do you calculate CLV?
There are a number of ways to calculate CLV, but this is a simple way to start. You will need to figure out the following 4 variables:
- Average purchase value: Divide total revenues for a set period (e.g. the last 12 months) by the number of purchase transactions for the same period.
- Average purchase frequency rate: This indicates the number of times a client has made a purchase with you over a given period. To calculate this, divide the total number of purchase transactions for that period by the number of individual clients who made a purchase during that same period.
- Customer value: This is not the same as CLV, but rather a customer’s value for a set period of time (in this example, the last 12 months). Simply multiply the average transaction value (point 1) by purchase frequency (point 2).
- Customer lifespan: This is the length of time that a customer has been active with your brand. For example, if the period between a client’s first and last purchase with you is 24 months, then that is their lifespan. Note that a more accurate calculation is difficult to measure, as you will need the customer’s transaction history over several years. That’s why it’s important to follow this over time.
These 4 variables give you all the information you need to calculate CLV. Simply multiply customer value by the average customer lifespan (in years). By applying this to each of your clients, you will obtain the value per client for their business lifespan with you.
Now that you know your customers’ lifetime value, how can you improve it?
Stay tuned for Part 2 of this article and learn some key ways to increase your CLV rate using a loyalty program.