How to Calculate Customer Lifetime Value and Use It to Grow Your Business
Summary
Customer lifetime value (CLTV) is an important metric to measure as Entrepreneurs grow their company.
In this episode I explain all about this key performance indicator (KPI). Specifically I go over:
- what CLTV is
- how to calculate CLTV
- how you can use CLTV to predict your sales growth and set revenue goals for your business
- how you can increase your CLTV
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Hello, friends. Welcome to the show today. We’re talking about customer lifetime value, one of the most important metrics that you can measure as you grow your company. Let’s get started. Welcome to build the business success secrets. The only podcast that provides straight talk for entrepreneurs. Whether you’re an entrepreneur, starting with an idea or growing your business, this show is for you.
We’ll teach you how to build a strong mindset, powerful body and profitable business so you can achieve success. And here’s your host, Brandon. See, White customer Lifetime value is the value of a customer over the span of their relationship with your company, and this may sound like blinding flash of the obvious, but it’s a really important metric to understand because it helps you predict revenue and helps you understand how long a customer stays with you. I’ll use a car dealership as an example.
When you buy a car from a car dealership, they generally don’t make a ton of money that they make more money on used cars than they do new. But let’s just take a new car. They sell you that new car. They make a minimal amount of money Their goal is to get you to come back and do service with them, and as a result, they understand their customer. Lifetime value of each and every car they sell isn’t just that car. It’s all the services that they get you to come back for, and once they understand that number, they can then improve it.
They could improve it through their customer service. They could improve it through their marketing. They could improve it through their representatives at high end dealerships like BMW, Mercedes Benz. In these places, you actually have a representative who is really a salesperson. But they can increase that number or that value of you and the revenue they receive by increasing or improving these things, and as a result they can predict their revenue. And you can do this with any company or service. One of the important things that you’re going to need to do and you start to think about as we think about customer lifetime value is what is our customer journey? What is our customer experience? If we make purses, are we just going to sell a person one purse and our customer lifetime value winds up being that purse value?
No. We want to create accessories so that we can Upsell people on those things and add to the value of each and every customer, because we know that it is easier to sell to in existing customer than to acquire a new one. Now this is a general statement, but it is generally true that that is the case. Your customer acquisition costs are generally pretty expensive to get a new person to trust you, to trust your product, to trust your service or whatever that is. So you want to understand that customer journey, and we’ll go over that in another episode.
But once you have that, you can understand where you’re trying to Upsell, so to speak your customer’s or continue to sell Clothing companies do this all the time. They come out with new styles, new colors, new products. They want you to keep buying because you’re already a customer, and it’s easier to do that. Now let’s talk about how to calculate your customer lifetime value.
The first thing you’re going to do is calculate the average purchase value. You may recognize this similar to average revenue per user that we calculated in the last episode and as a review, that is the total number of orders and the average price. So if you are Starbucks and an average coffee costs five bucks, you divide that by the number of customers. And in that case we’re using round numbers for this. It’s going to be five bucks. Next thing you do is you calculate your average purchase frequency rate.
This is why people like Starbucks have loyalty cards because they want to understand how many times a week you’re coming in to get your Java. You may say to me, Brandon, we don’t have a customer loyalty card. Then you can do surveys and survey your customer. And if you’re online, which almost everybody listening to this is selling something online, you can use your records In PayPal.
You can use your records and stripe. You can use something like bear metrics you can use. Shopify is back, and there’s tons of software that will help track this for you. In many cases, they’ll automate your customer lifetime value, but I want to teach you how to do it in a spreadsheet so that you fundamentally understand it. So you calculate the average purchase frequency as your second step. Now that we know what the average customer spends and how many times they visit each week, we can determine their value.
And in order to do this, I want to make sure that you understand you don’t look at the total. You look at each person individually at this point. So as an example using Starbucks, if a person comes to Starbucks five times a week and spends five bucks, they’re worth $25. The next thing we calculate is their lifespan. So how many weeks or months or years does a customer come back and buy a coffee? If you are a handbag company, how many times a month or year is someone coming back and buying an accessory for that handbag? If you’re a hairdresser, how many times is a person getting their hair cut and how much are you able to sell them each time they do get a haircut? If you are a service business, how many times a year does someone come back to you? If you’re an accountant, you know that every April likely someone’s going to come back to you.
What else can you give to your customers that has value during the year. To add to that tax return that you charge $400 for Can you do a tune up in the middle of the year and charge 50 bucks for that or 100 bucks or 500 bucks? That’s what we’re trying to figure out Here is how long the lifespan is. If your subscription business, the whole idea is to keep customers as long as humanly possible. In some cases. For instance, Google. We use Google Suite for build a business, all of our email or driving everything they’ve kept us for at least five years. And they’ll probably keep us for a long time because it’s pretty sticky unless they do something terrible or really screw our stuff up.
So this is what you’re looking looking for when you look for the customer’s life span. Now, with these four calculations, you can now calculate your customer lifetime value and the customer. Lifetime value is calculated by the customer value times the average customer lifespan. And now, with this calculation in this tab of our Excel spreadsheet, we can feed our revenue line in our cash flow statement and our profit and loss. And now we can understand what our business is going to look like in the future and how many new customers we need to acquire to hit our revenue goals. Now, before we wrap up, I want to touch on two things that you can do to improve your customer. Lifetime value number one Customer Satisfaction. How happy are your customers? How happy can you keep them?
What can you do to remind them that you exist? I order a very great tea from a place in Maine called Tempest in a Teapot, and they mix their own tea. I got it for Christmas one year, and I have reordered regularly. Now, every once in a while, I’ll start to run low, and they will send me a reminder Amazon does this to you as well. In some cases, a lot of companies now do this with automated reminders. Hey, Brandon, are you running low on T? We can send it to you. We’ve already preloaded with your last order shopping cart head right over here. Finish the transaction.
One of the quotes that I always remember when I start to think about customer satisfaction is one by Frank Price, who was the founder of Birthday University, of All Things and, he said, satisfied guests touched by positive emotions who leave with long lasting memories. Never ask how much it costs. And I always think about that quote because it reminds me that if you deliver a really good customer experience, regardless of what you sell, you will retain your customers. Zappos is a very famous example where their customer service can actually send flowers to the customer without manager authorization. They can do refunds, they can do all sorts of things, and that’s why you continually go back to Zappa’s.
I still use them to this day. It’s easy. They’re friendly. Experience is incredible, and rarely at this point do I go price check. And that’s what happens when you have incredible customer experience. Another incredible experience I had was with audio mute who makes sound dampening products for your studio or your house or your room. I have him in the room where I am right now, recording this episode and putting them in the new media studio that I’m building out back and Rick was incredible. He calls me, and I have never price shopped, and I’ve stayed with them.
So these are examples that you want to think about how you can increase and improve and deliver an amazing customer experience. The second thing that I want to mention which really builds off of that is customer retention and customer retention is really driven off the experience. So what can you do that will increase that retention? It could be things that I mentioned in the customer experience. Like reminders. It could be a personal note, and there’s crazy statistics out there that if you can increase your intention by just five or 10% it can increase your profit margin anywhere from 25 to 95%.
I think this was an article that I read and forget where I read it. But it was a study by banning company that they did it, and I think it said something like, If you increase your retention by four or 5% it can lead to a profit increase of 25 to 95% and that’s just crazy. It’s just one study, but it’s instinctively you understand that that’s true because as you increase that retention and the customer lifetime value extends. You are not spending as much money to acquire that customer because they’re already acquired and they already trust you. I hope this helps.
If you’re not measuring your customer lifetime value, start measuring it, build it in your spreadsheet in your marketing tab and have that feed your cash flow and profit and loss. And before you know it, you’ll have all of your targets and all of your goals and understand how many customers you need to acquire to hit your revenue goals and build your profitable business. MM, thanks for being generous with your time and joining us for this episode of Build a Business Success Secrets. Before we go, let me ask you a quick question.
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