If you want your business to thrive, you not only need to know what your customers' interests are, but also which of them are the most profitable customers for your business, so that you can make more effort to retain them.
CLTV stands for Customer Lifetime Value, a calculation that allows companies to predict how much profit a customer will bring to the company during the time they are a customer. What are you waiting for to apply it?
how does knowing the customer lifetime value help us?
The CLTV is a metric that allows the company to know the total revenue it can obtain from a customer. The calculation is based on knowing the revenue value of a specific customer and comparing it with the expected lifetime of that customer. The more purchases a customer makes during the commercial relationship established with the brand, the more profitable it will be for the company.
Imagine you have subscribed to an online magazine - the CLTV is the calculation that the magazine makes to predict how long your subscription will last and how that time translates into revenue for the company.
how does this calculation help us? It allows us to identify the most profitable customers so that we can focus on them. In this way, the company can focus not only on attracting loyal customers, but also on retaining profitable customers. The fact that a customer is loyal to the brand does not necessarily mean that it is profitable for the brand.
In addition, knowing metrics like this allows companies to make strategic decisions based on real studies, which will guarantee better results. Combining this with other calculations such as the CAC (customer acquisition cost), you can calculate the time needed to recover the cost of attracting a new customer, as well as check whether it is more profitable to retain customers or invest in attracting new ones. j
did you know that attracting a new customer costs five times more than keeping an existing one? That is why it is important to know which of your customers are profitable and to make an effort to keep them. It is not enough to acquire a specific customer, the ideal is to gain their loyalty so that they invest in your brand again, as this is less costly than attracting new customers.
For example, imagine buying a capsule coffee machine: you will be a loyal customer if after that first purchase you continue to buy the capsules offered by the brand itself and not those also offered by some of the so-called private label brands.
how is the CLTV calculated?
Now that you know what the customer lifetime cost is and what the advantages of knowing it are, we will show you how to calculate it. The formula for calculating the CLTV proposed by hubspot is as follows:
Average spend * acquisition cost * customer lifetime.
> Step 1: To apply this formula you will first have to calculate the average value of purchases over a given period of time. If a customer enters a shop 4 times and spends £8 in total, the average value of his purchase will be £2.
This same calculation will have to be repeated for a given number of customers (let's imagine a total of 6) and then add up all the averages and divide that value by the number of customers in the sample (6).
> Step 2: Next, we will need to calculate the average purchase frequency rate. If our sample is 6 customers, we will need to know the purchase frequency of each customer and calculate the average.
> Step 3: Next, calculate the value of the typical customer by multiplying the average value (result of step 1) by the purchase frequency rate (step 2), and as in the previous steps, calculate the average.
> Step 4: Next, you need to establish the average customer lifetime, a figure you can get from similar experiences in other businesses in the industry or in your own. The number of years the customer frequents the shop needs to be analysed, and can be an estimate if you do not have the precise data.
> Step 5: Finally, calculate the customer lifetime value by multiplying the average customer value (step 3) by the average customer lifetime (step 4).
how do companies apply this parameter? Let's look at the example of Netflix analysed by Neil Patel. According to the company's CTLV calculations, the average Netflix customer keeps their subscription for 25 months and according to them the lifetime cost of an average customer of the platform is $291.25.
This calculation, as Patel explains, is important because it helps the company determine how much money they can spend on a customer. However, it is important to note that, both at Netflix and at other companies, the difference in length of stay from one customer to another can vary greatly. There may be subscribers who stay for one month and others who stay for up to five years, for example.
By analysing each customer individually, the company can optimise their lifetime value. Within the Netflix application, there are different ways in which the brand can find out whether you will stay longer or shorter. One of them is through the "your list" option, which allows users to create a list of films and series they want to watch. In this way, Netflix can make new suggestions when you finish watching a piece of content, in order to try to keep you on the platform.
You already know how this calculation works, now, once you know what the CTLV of your customers is, you will have to go a step further and start to maintain their satisfaction by improving your customer service, focusing on those that are most profitable for you. Let's get to work!
