What is Customer Lifetime Value and Why Is It Important?

Most sales reps would probably jump to snatch up those 12 buyers. After all, more is better––right?

Well, not necessarily.

What if those 12 buyers only purchased once, but that one customer was loyal for years? Would you change your answer?

The quality of a customer is always more important than how many customers you have. Not only are existing clients cheaper to convert a second time, but they’re also more likely to buy more.

This means attracting a few high-quality customers who want to buy again are better for your bottom line than acquiring dozens of one-time buyers. And to truly measure the value of a customer, you need to find their Customer Lifetime Value (CLV).

Let’s break down:

• what CLV is and what it really tells you about the quality of your customers, and
• how to improve your customer lifetime value in 4 steps

The lifetime value of a customer considers how much money he or she spends over your entire relationship with that individual, regardless of how long that period of time is, how consistently they purchase, or why the relationship ends. (Learn more about how to build valuable client relationships.)

However, to get a realistic idea of how strong your CLV is, you need to compare it to your customer acquisition cost (CAC). CAC tells how much money you spent to acquire that customer. If your CAC is comparable (or even higher) to your CLV, your margins may not be large enough to be profitable or you might actually be losing money.

Here’s the formula for customer lifetime value and customer acquisition cost:

This formula can be adapted for months instead of years. For example, say you have a customer who spends $100 a month for one year. Their CLV would be $1,200.

Say a different customer only spends $100 a year, but they remain a customer for 12 years. Their CLV would also be $1,200.

While the two had dramatically different purchasing histories, they have the same CLV. However, you need to look at how CLV compares to CAC in order to determine if they are equally beneficial to your bottom line.

Let’s say your CAC cost for Customer 1 is $500. Your CLV to CAC ratio would be 1,200:500, which is pretty good. This customer is profitable.

However, let’s say it only cost you $50 to acquire Customer 2. Your CLV to CAC ratio for this client would be 1,200:50––much better than Customer 1. While both are profitable, one is bringing better value to your business.

But not every customer will have a positive CLV to CAC ratio.

Say you attracted a third customer, Customer 3, using the same tactics as Customer 1. You spent $500 to acquire that customer, but they only repurchased at $100 for 3 months. Customer 3’s CLV would be $300.

This customer would have a CLV to CAC ratio of 300:500. With this customer, you’re actually losing money––but you’d never know if you were only looking at customer lifetime value.

It’s always important to look at your CLV in the context of customer costs. It doesn’t how much your customers are spending if you’re constantly spending more to keep them around.

A customer’s lifetime value looks beyond what their business means to you today. It also considers the value they might bring to your business in the future.

You want your customer lifetime value to be high, but you also need to consider how it compares to the amount you’re spending to acquire customers. If you’re only looking at customer revenue, you might be running your business into a financial hole without even realizing it.

You can look at where you can cut acquisition costs or ways to increase your customer’s spending (but more on this later).

Your CLV can also tell you if you’re connecting with the right customers. If your acquisition costs are low but your customers aren’t purchasing a lot or sticking around for a significant amount of time, there could be a disconnect between who you’re connecting with and what you’re offering.

It could also be a sign that you’re not doing enough to retain customers. If customers make a large purchase one time but don’t buy again, you may need to up your retention strategy.

Knowing your CLV is important for improving your customer acquisition and retention strategy and creating a more profitable sales funnel.

CLV is only useful if you understand how it can be used to improve your company’s sales model and bottom line. Here are a few tips for improving the lifetime value of your customers.

1. Create (or improve) an onboarding process

Sales reps spend a lot of time and money convincing leads to make a purchase, only to never follow up once the sale is complete. Unfortunately, most customers aren’t going to come back for another purchase on their own.

A strong onboarding process can continue to nurture a new customer into becoming a loyal buyer. It should give them a full introduction to your products or services and encourage them to get the most from their purchase.

Check out Slack’s onboarding process. It begins with a welcome message to new team members, including an “Explore Slack” button to introduce new users to the platform:

It then introduces the user to different areas around the Slack platform.

By pointing out each area and giving a brief description of its purpose, Slack users are able to familiarize themselves with the platform before they get started. This can reduce confusion, ensure everyone knows what they should be doing, and make it easier for users to get the most of their experience.

If you’re selling a platform or solution, an onboarding process within the tool makes the most sense.

Or you can use an email to begin your onboarding process, as Asana does.

Asana uses an email onboarding process to slowly introduce new users to benefits and features of the platform. Starting out with three simple tips can ease the user into the new tool so they don’t feel overwhelmed.

Be sure to focus your onboarding process on the value and benefits the customer will receive. Both Slack and Asana do a great job of providing a brief description of how each feature of their tool can be used to make the end user’s life easier.

Your onboarding process can also be a full email campaign. Take a look at the eight-email campaign Copyhackers developed for Wistia that brought a 350% increase in paid conversions.

Copyhackers and Wistia sent one email a day to trial users. By treating their onboarding process as a mini sales funnel, they were able to convert more leads into paying customers and increase CLV.

2. Address common issues, questions, and education with email

Improving CLV depends on how well your products or services are meeting your customers' needs. This means answering their questions, providing advice, and giving tips on how to make the most of what you have to offer.

Unfortunately, customers aren’t always going to come straight to you when they have a question. If answers aren’t readily available, they may choose to purchase from a competitor who is providing more information.

You need to be proactive about getting the right information in front of them at the right time. Take a look at your sales funnel to identify what information your audience might need depending on where they are in the buying process.

Align your content marketing strategy with your sales funnel to send the information your audience needs right when they need it.

Again, email gives you an opportunity to reconnect with past leads or customers and educate them on your offerings or features. Here’s an example from Canva showing off their Magic Resize feature:

This email message addresses a common problem users might face: needing to resize images for different social platforms. Canva then presents a solution and even gives a free trial so users can get a feel for whether or not it appropriately solves their problem.

Create nurturing campaigns that address frequently asked questions, common issues customers may experience, or updates on what new products or services you’re offering. Make it clear what solution you can provide, and if you can, provide a trial or sample as Canva does.

3. Upsell, cross-sell, and bundle products

One of the easiest ways to increase CLV is to convince buyers to purchase more every time they order. Upselling, cross-selling, and bundling products can do just that.

Upselling includes offering additional upgrades to make the original product or service better suit the customer’s needs. Cross-selling, on the other hand, is offering supplementary products that can be used alongside the original product or service. Bundling is a combination of the two where you offer products or services commonly bought together.

Let’s look at Amazon for examples of each.

A product comparison chart of similar items with different features, like this one for the Echo devices, would be an example of an upsell.

These three different versions of the same item each provide different features and benefits. Amazon is trying to nudge you to purchase one of the larger Echo models by showing you exactly how they stack up.

The sponsored ads related to the item would be an example of a cross-sell.

Amazon isn’t trying to influence your initial purchase, they’re just trying to make you buy more. These additional suggestions work with your original item to enhance your experience.

The “Frequently bought together” section would be an example of a bundle.

By coupling the two together and making it easy to add both to your cart at once, Amazon hopes to influence your purchasing decision and convince you to buy more.

To create your own upsell, cross-sell, or bundling strategy, actively listen to what your customers are looking for. Focus on providing solutions––not just encouraging them to spend more money. Show your customer how that upgrade or additional product will provide them with more benefits and create bundles that make sense.

4. Prioritize customer service

Companies in the U.S. lose $62 billion every year due to poor customer service. When you’re not there to answer questions, provide recommendations, or give support, customers who may have been interested in purchasing again may choose not to.

To increase customer lifetime value, customer service needs to be a priority. This means going beyond just having a “help” email address or a customer service page.

Improve your customer service by adopting new technologies that work the way your audience expects. This can include having multiple options for getting in touch. Check out how Nordstrom does it.

Nordstrom gives users the option to contact them via chat, email, or by phone. They also provide different phone numbers depending on the country of origin or the department they’re looking to connect with, making it easy for customers to get in touch with the person they’re looking for.

They refine the process even more with their chat option.

You choose your reason for reaching out at the beginning of the process, which helps Nordstrom connect you with whoever is most likely to be able to help you.

To provide excellent customer service, give customers options. Each person has different needs and preferences for how they’d like their solution to be resolved, so make it easy for them to find a way to reach you.

Remember to branch out and provide customer service in other areas, such as on your social media platforms. Customers these days are quick to turn to social media because it’s often the easiest way to connect. Have customer support team members monitoring your account to provide help.

It’s always important to pay attention to what your customers are looking for. Provide them customer support options wherever they are asking for help. Adjust your strategy to be wherever they need you.

When it comes to customers, having high-quality, loyal fans is almost always better than securing dozens of one-time buyers. If you’re only monitoring how many people are buying––not how much they’re spending or how often they’re repurchasing––you’re missing the bigger picture.

Your customer lifetime value allows you to assess if you’re reaching the right target audience members and if you’re doing enough to keep them engaged. If your CLV is low, it could be a sign that your sales and marketing strategy needs some room for improvement––even if the number of purchases are high.

When you focus on improving your CLV, you end up growing long-term, loyal customers who want to buy again and again. How you go about improving your CLV depends on your current strategy, who you’re targeting, and what you’re selling.

Give these CLV improvement tips a try, but pay close attention to what your target audience is looking for. Be ready to give them what they need and adjust your sales and marketing strategy to accommodate their requests.