As a team dedicated to increasing your bottom line, we can’t help but stress the importance of knowing your numbers and using data to make informed decisions for marketing, sales, and operations.
More importantly, knowing your numbers will help protect you from whatever the world throws at your business be it inflation, recession, labor shortages, plagues, and customer demand trends.
That said, Customer Lifetime Value (CLV) is one of those numbers that’s worth calculating from time to time as you make decisions and evaluate your company’s performance.
What is Customer Lifetime Value (CLV)?
CLV is a measurement of how much revenue a customer generates during the average amount of time they spend with your company.
For the purpose of this blog, we are only discussing CLV as it relates to revenue generated. You can form more advanced calculations of CLV by incorporating profitability into the overall calculation of CLV. That will be discussed in a future blog.
It’s also important we note that CLV can be calculated for individual customers, for a grouping of customers, or all customers. Your purpose for calculating CLV will determine which type(s) you use and when.
Common Purposes for Calculating CLV
CLV is one of those numbers that’s just good to know at a given time, like your average profit margin. However, there are several purposes for calculating CLV at a given time.
Here are a few reasons why you might want to calculate CLV for your company:
Identify your highest or lowest value customers
Identify your highest or lowest value services
Determine how much you’re willing to pay to get new customers
Decide how important it is to retain existing customers
Identify ways to increase revenue
Find where most of your revenue is coming from
Determine which services you should promote
Identify ways to increase profitability
Assess new market opportunities
Prepare to sell you your business
Identify your best or favorable customers
Regardless of the purpose, CLV helps you make more informed decisions about certain aspects of your business.
Use CLV to Make More Informed Decisions
The reason for knowing your numbers is that it helps you make decisions for your company that are based on data instead of your gut. Here are some decisions for which it’s helpful to know the CLV figures for your company.
Marketing Budget
By knowing how much a typical customer will make your company over time, you can get a better idea of how much you’re willing to spend to get a new one.
One of the big roadblocks for company growth is inadequate spending on marketing. Companies will often set a conservative marketing budget because they don’t weigh it against CLV.
Instead, they look at the short-term return on marketing by weighing the marketing budget against revenue generated in a year or even during the length of the advertising campaign.
This conservative and short-sighted approach to spending on marketing is often what puts a company behind their competitors. Unfortunately, the rate of acquiring new and quality customers is directly related to how much is spent on marketing.
For more information on how much money your company should be spending on marketing check out this blog about it!
Promotions and Discounts
Offering different promotions and discounts is a tried-and-true method for getting new customers. However, discounts can do more harm than good if a company hasn’t considered how much it can afford to discount a service.
By knowing the average CLV, you can determine how much you can discount a service, what services you can discount, and how long it will take your company to make back the money conceded during a promotion.
You might even find that you can offer a bigger promotional discount for new customers especially if you offer repeat services over the course of several years.
Targeting Your Ideal Customers
If you’re in a service industry, you know that some customers are better than others. Some stick with your company longer, generate more revenue, and require less cost.
Calculating CLV for individual customers or customer groupings can help you separate the highest value clients from the clients that are doing more harm than good.
We encourage all of our clients (offering commercial or residential services) to identify their ideal customer, so we can refine our marketing efforts to reach the best customers.
Why spend money getting customers that are going to lose you money in the long run? Knowing your CLV per customer type will help you avoid this issue!
Adjusting Operations
Knowing CLV figures can help you make hard decisions regarding company operations.
You can feel more comfortable making price increases, letting go of low-value customers, prioritizing services, suspending services, hiring talent, creating company projections, and much more.
How to Calculate CLV?
When it comes to calculating CLV, “there are different ways to skin a cat.” Selecting the best method for calculating CLV for your company will depend on a few factors like the service you offer, the length and frequency of your service, your purpose for calculating this metric, and your industry.
Below are a couple ways to calculate CLV along with who will benefit from using them.
Option #1
Best for residential and commercial lawn maintenance, residential and commercial landscape maintenance, pool maintenance, and any other service business with periodic, long-term maintenance.
Option #2
Best for residential and commercial landscape design/build, floor covering installation, pool installation, shower door installation, and any other service with one-time installations or service offerings.
Please note that these are the more palatable options for calculating CLV. There are more complex formulas for calculating CLV to answer specific or nuanced questions, but those methods should be passed to a data scientist to handle.
Now that you know how CLV is calculated, we can discuss the factors that contribute to CLV.
What Factors Affect CLV?
After seeing how CLV is calculated, it’s obvious that the price of your company’s services and the average lifetime of your customers directly affect CLV. However, there are many other factors that influence your CLV.
Type of Service
The nature of your service offerings often affect your CLV figures.
For example: A commercial landscaping company might keep customers for 3-5 years while a residential floor covering company might never see customers again after the job is done.
Knowing how your services affect CLV can help you identify opportunities to increase CLV by adjusting services or plan marketing campaigns that are more compatible with your services.
Type of Customer
CLV can be heavily influenced by the type of customers a company has.
For example: Your company might offer a promotional discount that attracts lots of customers who value cheap pricing over quality.
So once the promotional discount ends, your company might experience a lot of customer churn or turnover – which will contribute to a low CLV.
By evaluating the CLV for customers who stick around vs the ones who drop off, you might find patterns that will help you avoid attracting the bargain seekers in future marketing efforts.
Competition
The level of competition in your industry and region will affect your CLV by influencing pricing and customer loyalty.
For all industries, high competition places downward pressure on pricing. For maintenance-based services like landscape maintenance or pool maintenance, dense competition empowers customers to leave their service provider for another.
Knowing your CLV for different customer groups (e.g. customers using ___ service or customers at ___ price point) can help you identify opportunities to position your company against competitors by targeting a different set of customers or pivoting to a different service offering.
How to Increase CLV?
It’s safe to say that increasing your company’s CLV means increasing your company’s revenue. Here are several ways you can go about increasing CLV.
Upsell
Upselling involves selling additional services to a new or existing customer. Upselling can be done using email marketing campaigns to inform and educate customers about the additional services.
Your company can also upsell existing customers manually by having an account or customer service manager reach out by phone or email.
Improve Customer Retention
Customer lifetime directly impacts CLV, so improving your customer retention will directly increase your company’s CLV.
Improving customer experience is a great way to improve retention. This can be done by having customer service reps, sales reps, or account managers dedicate time to check in on existing customers.
Investing in technology that makes the customer experience more seamless is another way to help improve the customer experience and retention.
Offering incentives or promotions throughout a customer’s lifetime can also improve their experience and build customer loyalty.
Target Those with Larger CLV Potential
When you’re aware of your CLV, you can start to target customers that are likely to result in a larger CLV.
This might look like finding customers who have larger houses if you offer floor covering installations or finding customers who have bigger yards if you offer lawn maintenance services.
You might also want to target customers who value quality service over price because they’re more likely to stay with your company for longer periods of time as long as they receive quality service.