Utilizing Customer Lifetime Value (CLV) Metrics to Optimize Customer Experience & Small Business Growth

Customer Lifetime Value (CLV) refers to the total profit yielded by a consumer over the course of their relationship with your product or service. Even though CLV is a relatively simple business metric, it is an important one, because CLV can provide key insights to spot early signs of customer attrition, as well as identify areas of opportunity. 

CLV is particularly useful in the context of small businesses, where customer experience is of the essence. By understanding the CLV of each customer, as well as utilizing customer satisfaction metrics, you can pay individualized attention to each customer’s relationship with your product or service. From there, you may implement strategies to optimize customer experience and relative customer value. 

Market Segmentation & Strategy Implementation Using CLV

By calculating the CLV for different customers, your business may be able to identify separate “buckets” of customers. This may be enhanced with Customer Experience Management metrics, such as Customer Satisfaction (CSAT) and Net Promoter Score (NPS). CSAT and NPS questions may be incorporated into feedback surveys that ask customers how satisfied they are with your business, and how likely they are to recommend you to a friend. 

These metrics, combined with CLV, may point to the direction of your most loyal customers, as well as the customers that are more likely to discontinue their relationship with your business. 

Building Relationships with Loyal Customers 

By marking this segmentation, you may implement strategies that recognize the loyalty of the customers with higher CLV, NPS, and CSAT scores. Such strategies may include promotional offers, exclusive offerings, as well as a loyalty program. 

Closed-Loop Feedback with Unsatisfied Customers 

A closed-loop feedback system refers to a hands-on response to customer feedback. Using metrics such as NPS and CSAT, you will be able to identify customers that are most likely to discontinue using your product or service. By incorporating a closed-loop system, you will be able to specifically address the concerns of those customers and turn them into loyal customers. 

Revamping Acquisition Strategies

Using CLV, you will be able to identify the revenue yielded throughout the lifetime of each customer, compared to the costs associated with acquiring and serving them. By doing so, you may identify areas of improvement when it comes to acquisition strategies. You will be able to weigh the benefits versus the costs of using specific acquisition strategies and assess the value of each. For example, if you spent $100 dollars on targeted advertising for each consumer, but their CLV is $80, then this may be an indicator that you have to switch gears in acquisition strategies. 

Though there are a multitude of ways to calculate CLV that may best fit your business structure, one of the most universally used ones is the Traditional Customer Lifetime Value Formula.  

Key Variables to Consider when Calculating the CLV

Gross Margin per Customer Lifespan (GML): refers to the gross profit expected over the average customer lifetime. This may be calculated by subtracting the average costs associated with obtaining and retaining each customer from the average revenues yielded by each customer. 

Retention Rate (R): refers to the percentage of customers that stay in business with you over a set period of time. 

Discount Rate (D): refers to a percentage to account for inflation. D is usually set at 10%. 

Traditional CLV Formula: GML * (R / (1 + D - R))

For example, if your company’s GML is $1000, and you retain 60% of your customers, with a discount rate of 10%, the CLV would be calculated as follows:

$1000 * (0.6 / (1 + 0.1 - 0.6)), which would equal $1200. 

Another simpler way to calculate CLV entails multiplying customer revenue per year by the duration of the relationship in years and subtracting the costs of acquiring and serving the customer. 

Ultimately, Customer Lifetime Value is a valuable metric when it comes to optimizing customer experience. Not only does it allow small businesses to understand the profit yielded by each customer, but it also provides insights into promising areas of business growth and revamping. Listen to your customers and understand their journey - this will allow you to reward the most loyal ones, and “close the loop” with the apprehensive ones. 

As a social impact initiative, Rem and Company also offers free consulting services and resources to small businesses and nonprofits impacted by COVID-19. Our pro-bono consulting teams provide small businesses with the opportunity to identify and prioritize issues facing their business, propose innovative strategies, and facilitate execution. If you are a small business or nonprofit in need of assistance, learn more about how we can help.