Customer Lifetime Value, or CLV, refers to the average spending by customers throughout their subscription before churning (ending the subscription). It is also referred to as the average revenue per user and is calculated based on the Customer Lifetime Value formula.
Subscription service providers use CLV to measure their customers’ value. As such, it is one of a provider’s most crucial business metrics in the subscription economy.
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A subscription service’s profitability typically increases as the customer relationship extends. However, profit is not generally achieved from day one. Indeed, many subscription services only reach profitability after a specific contract duration.
For instance, after the cost of acquiring a customer has been covered.
Of course, the longer companies can retain their customers within a subscription service, the better. With time, the more value they’ll receive and the higher their customer/service profitability ratio.
Therefore, a company should retain customers and encourage them to purchase additional products and services, such as renewals or upgrades.
Subscription business models are ideal for building relationships that increase long-term Customer Lifetime Value.
CLV enables you to consider how best to optimize spending on customer acquisition.
However, not all customers are equal. For instance, they will generate different revenue amounts and have varying acquisition costs and other differing metrics.
Measuring Customer Lifetime Value lets you evaluate how much to invest in customer retention. You can also better define your marketing goals, reduce acquisition costs, and maintain or increase customer retention.
Moreover, measuring CLV enables you to allocate resources to increase customers’ spending on your brand.
Why Should You Measure CLV?
According to established marketing metrics, your chances of selling to a new customer are between 5-20%. Compare this to the 60-70% probability of selling to existing customers.
It should provide a compelling reason to measure Customer Lifetime Value in any business model based on recurring payments.
Analyzing CLV lets you take a closer look at your business’s long-term health. Such analysis will show you if your current acquisition and retention strategies are designed to achieve quick wins or sustainable, steady growth.
Also, measuring CLV provides you with critical customer information. With this data, best found inside a subscription management software, you can answer some crucial questions, such as the following:
- What should you spend on customer acquisition?
- What should you spend on customer retention and reacquisition?
- How suited are your offers for your best customers?
Calculating Customer Lifetime Value
There are several methods of calculating CLV, with content orientation influencing the complexity of each. You should consider what you want to calculate and which departments you will include when calculating Customer Lifetime Value.
Before you start, you should determine the following figures:
- Average order value.
- Retention and repurchase rates.
- Acquisition and retention costs.
You can base retention and repurchase rates on an assumption. However, the best solution is to use empirical values.
Customer Lifetime Value formula
Let’s assume you have 60 customers remaining from the 100 you had last year. Your retention rate is 60%, and your customer churn rate is 40%.
Also, we’ll say your acquisition costs are €50, the contribution margin is €20, and the repurchase rate is 12 per year.
Here is an example of how to calculate the Customer Lifetime Value with the formula based on these assumptions:
Customer lifetime = 1 / (1-0.60) = 2.5 years.
CLV = (€20 x 12) x 2.5 years (- 50) = €550
Of course, these calculations don’t take into account complex tariff models.
For instance, you might offer upgrades, discounts, premium rates, and other subscription levels.
Therefore, these should be considered when calculating CLV. Also, you should differentiate between predicted CLV and that based on historical data.
Improving CLV Through Onboarding and Customer Satisfaction
The better experience a customer has the first time they use your products or service, the more likely they are to come back. Therefore, customer satisfaction and smooth onboarding are crucial to encourage customers to return frequently.
Ultimately, this will translate into higher long-term value and increased monetization of your products.
Such a customer-centric focus should start from your first contact with a customer and their onboarding. Indeed, you should personalize onboarding and streamline the process as much as possible.
Create High-Value Offers
There is no secret formula for successful product creation. However, top-performing products tend to address a specific pain point and provide a solution.
Therefore, when developing your product or service, you should consider your customers’ needs and how you can give them value quickly.
Make Customer Support and Satisfaction a Priority
Customer satisfaction and support must be one of your top priorities. It should start even before they’ve purchased and continue afterward.
Providing an excellent user experience, remaining proactive to their needs, and responding quickly to their queries are the foundations of customer service.
According to research conducted by Microsoft, 90% of American consumers consider customer service as a deciding factor in making a purchase.
Increase Your Average Order Value
You can also improve your CLV by increasing your average order value. Upselling and cross-selling are excellent opportunities to achieve value increase. Therefore, consider offering customers complementary products or services as they are about to make a purchase.
Good Customer Communications
You should understand your customers’ needs by building relationships and actively listening to their concerns. Collecting feedback and responding to their questions through appropriate channels is a good start in achieving good customer communication.
Implement a Dunning Management System
Implementing a dunning management system will reduce frustrations arising from payment issues. You do not want to stress or concern your customers about potential service interruptions due to card expiration or invalidity.
A dunning management system is usually a part of good billing software.
Remain Relevant
In a rapidly changing world, customers’ needs and expectations will likely change just as quickly.
Other businesses will be quick to cater to these needs. Therefore, if you want to retain customers, you have to provide them with offers they find relevant and enticing.
Moreover, you must maintain a competitive advantage to present to your customers.
Conclusion
Customer Lifetime Value is an excellent metric to determine and forecast what you should spend on marketing and customer acquisition. However, it also comes with an element of uncertainty when making predictions.
Such uncertainty is challenging in estimating customer relationship duration and potential spending, particularly for start-ups.
Established companies find this less of a challenge, especially those with several years of track record. You should view Customer Lifetime Value as a dynamic tool for subscription companies to support forecasting.
As you continue to use it, CLV will become more accurate over months and years.
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