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If you have experience with digital advertising, you know how much easier it is to market to people who have already been customers. They are already familiar with your brand. You do not have to worry as much about building brand awareness for repeat customers. Also, people feel better buying from a place they know.
Calculating the typical customer life time value will let you know how much money to spend on your PPC campaigns. Having a working lifetime value of a customer formula is required for making a proper budget.
By understanding average customer life time value, you can assign more accurate values to conversions and clickthrough rates. Enticing a customer to buy a product for $5 could be worth a lot more than $5. The lifetime value of a customer formula lets you make accurate predictions about your customers’ meaning for your brand.
Either you have old customers or targeting new, you always need to have best suitable targeted keywords in your PPC campaigns. PPCexpo Keyword Planner is such a great tool to find the appropriate keywords for you and you can filter the results based on different parameters.
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Customer life time value sounds like what it is. It is the amount of money a customer generates for your company during their time as a paying customer. It is a necessary metric for planning and is simple to calculate.
A lifetime value of a customer formula shows how much money to invest in remarketing and customer retention. In most cases, you look at average customer life time value. However, you can calculate for individual customers.
You can use a lifetime value of a customer formula to determine individual lifetime values. Doing so can tell you how much to invest in a customer. If they have a low customer life time value, it might be worth the effort to get that number up.
Figuring out the customer life time value requires the use of a lifetime value of a customer formula.
The most basic lifetime value of a customer formula is as follows:
Customer Life Time Value ($) = Order Value ($/order) x Order Frequency (order/year) x Customer Lifetime (years)
Let us look closer at the figures that make up the lifetime value of a customer formula. The order value is the average order value a customer makes. Order frequency is the average number of orders a customer makes per year. Finally, customer lifetime is the number of years a customer remains a paying customer.
Imagine you are calculating customer life time value for your video game store. You might have some customers that only use your store to buy video games for their family members around the holidays. This customer might look like the following in the lifetime value of a customer formula:
Let us take a look at a customer who buys themselves video games and accessories:
Both types of customers generate value for your brand over their lifetime. However, one has a significantly higher customer life time value. You want to invest more in marketing to customers that align with your high-value customers.
There are many variations to consider for customer life time value. It can depend on variables between customers. It can also change when you make changes to your brand or business plan. Regardless, understanding this simple lifetime value of a customer formula will help you plan for success.
When you pay to acquire a new customer, you want to pay less than the customer life time value. You might be used to optimizing your spend for conversion value or total conversions, but looking beyond the customer’s first purchase will set you up for success.
Think back to the video game store example. You might be able to get a higher return on ad spend for a customer doing holiday shopping. For whatever reason, it takes less effort to attract them to buy one item from you.
With a gamer, it could take frequent ads to hook them. Someone who buys the same product with frequency wants consistently good customer service. It might seem like you are losing out when they initially only buy one $50 product. It seems you paid more for that $50 than with the holiday shopper. However, when the gamer keeps coming back, you realize that your return is much higher. That is just one example of how calculating customer life time value benefits your business.
Determining which customers to target is not the only use of customer life time value. Customer life time value is also a metric that you can increase. By increasing customer life time value, you ensure more revenue.
One route for increasing customer life time value is through retention. Retaining customers is a combination of meeting their needs and intuitive marketing. Increasing the customer life time value of your audience through retention will drive your performance.
Get Customers to Come Back for the Quality Service
You can focus on your business model to drive customer retention. A customer could fit the average high-customer life time value type, but they need a reason to return to your brand. Investing in brand loyalty will boost customer life time value.
One way to drive brand loyalty is by offering easy returns and shipping. A customer that cannot return a product will never buy from you again.
Likewise, receiving a product well after the promised delivery can leave a bad taste in a customer’s mouth. It is best practice to tell a customer that shipping will take longer than you expect. If it arrives on time, they are happy it came early. If it is late, they will think it is on time.
Incentivize Retention With Loyalty Programs
Another way to increase brand loyalty is through customer incentive systems. Another word for this is loyalty programs. Customers are way more likely to purchase a product from someone who rewards them for doing so.
Loyalty systems can also be an opportunity for targeted advertising. You can figure out what customers in your rewards program like and tailor the rewards to fit their needs. Doing this will make customers feel like they have a personal relationship with your brand and increase your customer life time value.
Having a targeted campaign to advertise your rewards program can organically build a loyal customer base. Another upside to a rewards program is it builds purchase data on individual customers, which can be useful in retargeting.
Retargeting to Get Customers Coming Back
You can drive customer retention by using remarketing and retargeting. It is easier to get a customer to buy from you a second time than the first time. Likewise, a customer who has bought from you multiple times is likelier to do so again than one who has only bought from you once.
If somebody has already purchased from you, you can hit them with an email when a related product enters your inventory. You can also determine when a customer is likely to buy the same product and send them a subtle reminder to repurchase it from you.
Using the lifetime value of a customer formula, you should notice that customers who repeat once are likely to keep coming back.
There is another insight to be gained from the lifetime value of a customer formula. It is not explicitly present but informs the average order value. Categorizing customer life time value by which products a customer purchases can tell you which of your products are more profitable.
Objectively looking at trends in your data can help drive metrics. For customer life time value, this can mean noticing which products high-value customers purchase.
You can figure out which of your products are more profitable by number. You do not even need to know why they produce high-value customers. If you use the lifetime value of a customer formula correctly, you will see clear trends and stock inventory accordingly.
Perhaps your customers with the highest life time value are drawn to a specific offering. You want to make sure your target audience knows you carry it. You also want to remind past customers of your brand periodically. Building brand awareness makes sure people come to you when it comes time to purchase.
You can even tie in high-value items to your loyalty program to guarantee customers buy the same product from you. For example, you can offer a discount to customers who already purchased the product from you one time.
Knowledge of what types of products high-value customers want is valuable too. Returning to the video game example, perhaps high-value customers prefer a specific genre of game or a specific console. You can guarantee revenue through new products that fit the buying trends of your high-value customers.
Another way to use related products to drive customer life time value is by suggestions at check out. Using the data gleaned from your lifetime value of a customer formula, you can see what items high-value customers buy in conjunction. It will suggest these items at checkout to people that appear to have a high customer life time value.
There are many different ways you can segment the data you calculate with the lifetime value of a customer formula. You can use the data you have to personalize your campaigns and target high-customer life time value audience members at exactly the right time.
If you understand the customer journey, most people who browse do not end up purchasing. Seeing when people click on your ads and go on your site is still useful information. It is useful to compare trends in this kind of activity to consumers with higher customer life time value. You can see how people signal that they are ready to buy and target them more aggressively.
Another useful bit of data to glean is what types of devices customers with higher customer life time value use to make purchases. It might seem somewhat arbitrary, but humans can be habitual and predictable. If you look at the shopping habits of high-value customers, you will see that they tend to purchase on consistent channels.
You might find that most of your valuable customers are going to your website from your email advertisements. You could also see that notifications on your app drive customer life time value. Pay attention to whatever trends you notice, and you will see your customer life time value increase.
To calculate Customer Lifetime Value (CLV), you’d start by determining the average purchase value, frequency of purchases, and the customer lifespan. For instance, if a customer spends $50 per month, shops 6 times a year, and remains a customer for 5 years, the CLV would be $50 x 6 x 5 = $1500. This estimation helps gauge a customer’s long-term worth to a business.
While there isn’t a universally standardized formula for Customer Lifetime Value (CLV), a commonly used approach involves multiplying the average value of a purchase by the frequency of purchases, multiplied again by the average lifespan of a customer. Other variations and adjustments exist based on specific business models and objectives. The formula can be customized to suit different industries and business contexts.
There are many different ways to look at your customers, but customer life time value might be one of the most important metrics. It tells you how much money a customer can be expected to bring in on average to your company and guide you when deciding who to target. It can also inform budgeting and business plans. The daily transactions that take place on your website as a result of advertising are also important.
Looking at transactions in light of customer life time value adds dimension to your data. By using the lifetime value of a customer formula, you will begin to see which types of customers to focus on. You can even realize which aspects of your business are most profitable. Keeping your long-term customers in mind will also naturally make your brand more personalized. There is no reason not to start calculating customer life time value today.
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