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Customer lifetime value: The most important metric everyone overlooks

Written by Ryan East

Published October 13, 2022

Customer lifetime value (CLV) is not a new concept. It’s the total revenue from a customer over the entire duration of their relationship with your business, from first to final purchase. 

It’s an important measure of customer loyalty, as well as a signal of the return on your overall customer acquisition cost (CAC). And yet, most companies aren’t doing enough about it. Chances are, you’re part of the 98% of business leaders who recognize the importance of CLV—and among the three-in-four who know you aren’t monitoring it properly or at all, according to industry surveys. 

We’re turning the spotlight on CLV to talk about what’s happening if you’re not following this critical metric, and what can you do today to get back on track.


Fail to understand customer lifetime value, miss revenue

Before getting too far ahead, let’s start here: What’s your customer lifetime value? Do you know? And are you doing anything to optimize or increase it?

From the C-suite, you’re focused on tying dollars to your pipeline and closing deals. But if you’re not looking beyond new business, you’re missing a significant opportunity to generate revenue from your existing customer base.

Companies that only focus on revenue might face a lower CLV, particularly if their strategy doesn't consider building satisfaction and trust (prerequisites for retention, cross-sell/up-sell, and future referrals). Focusing on a long term relationship with the customer ensures you're delivering consistent/continual value, not just trying to make the next sale. It comes down to this: deliver value, get revenue.

Of the small number of businesses that have successfully kept an eye on CLV, more than 4 in 5 have actually generated more sales. In fact, existing customers are 50% more likely to try new products and spend 31% more than new customers. If CLV isn’t a priority for you right now, it’s safe to say you’re leaving dollars on the table.

There’s a fixed cost that comes with acquiring a new customer. Don’t stop after you’ve paid it out and generated your first sale. Start focusing on the additional revenue you can get from them in the long run. It costs less to expand your footprint with the loyal customers who you’ve already won over than it does to drive net new revenue.


What can CLV tell you?

As a customer experience metric, CLV can tell you several things when examined in conjunction with other benchmarks like net promoter score (NPS) or customer satisfaction score (CSAT).

Customer lifetime value reveals how satisfied your customers are with your offerings and how much brand resonance you’re building with your buyers. It also shows how likely customers are to keep coming back for additional products or services. CLV also helps you understand exactly how long your audience wants to stick around and spend with you before they move on.

In other words, it proves the ROI of your customer experience investments. A lower customer acquisition cost paired with a high customer lifetime value means your acquisition tactics are driving a lot of value. Meanwhile, a high CAC paired with a low CLV means you’ll struggle to grow in the months and years to come. Happy customers are more likely to recommend your brand, so you don't need to spend money to acquire prospects.

A high CLV proves that you’re offering the right kind of experience and doing a lot of things right—winning over the right target audience, keeping customers satisfied, and giving buyers reasons to keep buying. It also indicates increased retention and churn reduction.

A CLV slump means you have room for improvement. When you examine customer lifetime value alongside other sales metrics, you might discover that you’re doing a fantastic job attracting first-time customers, but they’re walking away after just one or two transactions.

You can also build out a predictive model around CLV to forecast how much you’ll make for every new customer you win. Keeping tabs across the journey will give you a clear picture of the health of your organization and the happiness of your customers.

Overall, CLV insights can help you design a customer journey in a way that provides the most value to your customers throughout your relationship, while simultaneously generating the most value from them.


How to calculate your customer lifetime value

Figuring out what CLV looks like at your organization doesn’t have to be complicated. You can start with this simple equation: Multiply the average customer relationship duration (in years) by the average annual revenue per customer. Subtract the average customer acquisition cost and you’ll end up with a basic understanding of your customer lifetime value. 

There are ways to drill down into the nuances of what annual revenue per customer looks like specifically at your organization, but this is a solid starting point.

If the figure feels uncomfortably low—especially when looking at the CAC-to-CLV ratio—there’s work to do. What if you’re not sure why customers are slipping through your fingers? Ask them directly.

At Alida, we help customer-centric organizations break down barriers, listen to, and act upon the voice of invested and vocal customers. By empowering brands to listen to what their customers want, we enable them to prioritize the changes likely to have the biggest impact.

Connect with us at Alida to see how we can help you track and optimize CLV within your organization.

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