What is the importance of Customer Lifetime Value?
Customer Lifetime Value (CLTV) is one of the most important metrics that businesses track. CLTV, also known as Lifetime Value (LTV), is the amount of money your customer is worth to you over the entirety of your business relationship. Or simply put, it is the total amount of money that a customer will spend on your business over their lifetime. Calculating and monitoring CLTV is essential because of the following:
Knowing the more cost-efficient marketing strategy
When you know the CLTV, then you can also decide how much you need to spend to acquire new customers. If your customer acquisition cost (CAC) is higher than your CLTV, then you’re losing money for every customer acquired. You’re on your way to failure.
In that situation, your CTLV affects the acquisition channels that you use. You’ll have a better understanding of which acquisition channels to retain or which ones are too expensive for your business.
Segmenting the customers based on their value to your business
Calculating CLTV gives you the average spend of all your customers. But you can also use CLTV to segment your customers. For instance, you can divide your customers into the top 20%, the middle 30%, and the bottom 50% of the CLTV.
By segmentation, you can better understand the profile of customers that gives the most value to your business. And you can also strategize how you can improve your engagement with each customer segment.
Allocating resources based on the numbers
On different pricing strategies, support is allocated depending on how much customers are willing to spend. The higher the plan that customers purchase, the more support that they can get. And you can also do that with CLTV.
If you calculate and monitor your CLTV, you’ll have a better strategy on how to allocate your resources depending on the value that customers give to your business.
How To Increase Lifetime Value
Increasing the LTV of new customers by reducing churn will increase the long-term profitability of your company. It is recommended that you have a retention strategy tailored towards different LTV segments in order to reduce churn. If the current expected lifecycle of a customer is 6 months, you could create packages that are 7 months long, or allocate an account manager during the last two months of the lifecycle and step up efforts to increase the likelihood of renewal.
For companies with non-subscription based pricing, one effective method of increasing LTV is to create add-ons that can be up sold to customers in order to increase their LTV.