Customer lifetime value or CLV is a must-measure metric for every contact centre, accurately reflecting its profitability per customer. Research suggests that nearly 82% of companies will adopt a CLV model by 2023, up from 51% in 2020. Measuring and improving your CLV can help you stay ahead of the competition in a CX-centric world, and avoid reducing each customer to the value of a single transaction or purchase.
Let’s consider the meaning and formula of CLV in more detail
Defining Customer Lifetime Value
CLV encapsulates the total amount of net revenue you can expect to earn from a single customer across their lifetime, factoring in the costs of acquiring and retaining them, as well as any non-purchase customer activity that might add to your profits such as referrals and positive reviews.
As you can see it is a much more holistic metric than average transaction value or average revenue per customer, as it accounts for both the pros and cons of customer interaction management.
The customer lifetime value formula differs from one organisation to another, depending on the nature of your business. A simple way to calculate customer lifetime value is:
(Average order value x number of repeat sales x average retention period) – average cost of acquisition and retention
You could also add another element here, which is customer churn. In case your retention efforts fall short of expectations, you will likely witness customer churn, influencing the average CLV across the organisation.
This modified formula looks as follows:
(Average order value x number of repeat sales x gross margin in percentage) ÷ churn rate
Based on your performance KPIs, you can tweak this formula to better represent the real-world value a customer brings to your organisation.
Who Should Measure Customer Lifetime Value?
CLV is a crucial metric for outbound contact centres that are typically engaged in sales activities. Companies in both B2B and B2C sectors should keep an eye on this metric, ensuring that customer engagements remain profitable and acquisition costs aren’t too high.
Note: The ideal customer lifetime value will depend entirely on the nature of your business – whether you have a small, high-value target audience, a subscription model business, or a large-scale B2C sales engine.
How to Improve Customer Lifetime Value?
- Explore tactics for customer reacquisition to offset churn rate
- Engage through multiple channels to build a personal connection
- Invest in knowledgeable customer service professionals to prevent churn
- Offer anticipatory service by picking up on social media queues and mentions
- Conduct feedback surveys to identify bottlenecks before they become a problem
- Upsell and cross-sell through product bundling, personalised recommendations, freemium services, etc.
Customer lifetime value is both an ongoing and predictive metric. You could measure the average lifetime value for the existing relationships so far (e.g., value contributed in three years from initial customer acquisition). But we’d recommend using business intelligence tools to model CLV projections, so you know which tactics are most likely to boost your organisation’s profitability.