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How to Identify Your Most Valuable Customers

posted by Michael Epps Utley Michael Epps Utley
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Do you want to retain more of your best buyers and improve the bottom line of your business? Who doesn’t?

It’s far cheaper to sell more to current satisfied customers than to attract new ones.

The best way to sell more to your top clients is to figure out the customer lifetime value (CLV) of the people you do business with. This guide explains what you need to know to determine CLV.

What to Know About Customer Lifetime Value

What Is Customer Lifetime Value?

Customer lifetime value (CLV or CLTV) indicates the total revenue a company can expect to earn from a single person or account through an entire business relationship. It factors in the customer's revenue value per purchase and extends that number to the anticipated customer lifespan. The longer your customer buys goods and services from your organization, the greater their LTV becomes. CLTV also typically increases when businesses improve their customer experiences.

Why Is Customer Lifetime Value Important?

In addition to playing a key role in customer retention, the metric is critical for the following reasons:

  • When CLV goes up, it typically raises revenue over time.

  • CLV helps identify customer service issues so you can make improvements that can enhance customer loyalty and retention and the reputation of your business.

  • Tracking CLV can reduce churn.

  • CLV can help you make better business decisions.

  • CLV helps identify, target, and do business with your ideal customers.

  • Increasing CLV can lower customer acquisition costs.

  • CLV makes financial planning simpler.

  • It makes customer segmentation more powerful.

  • Increases and decreases in CLV can help you identify trends that make it possible to improve your products and services.

Lifetime value data can help you identify where you need to make improvements that align with customer needs, resulting in higher satisfaction, additional repeat business, and more referrals. Tracking this metric can increase customer loyalty and differentiate your company from competitors. On top of this, it makes doing business easier and helps improve decision-making. Monitoring this metric provides more benefits than paying attention to almost any other.

Two Methods for Calculating CLV

Now that we’ve explained the importance of customer lifetime value, let's look at the two forms it can take. It’s critical to understand them because each can deliver different outcomes.

Predictive Customer Lifetime Value

The predictive CLV model anticipates the buying behavior of existing and new customers by leveraging regression or machine learning.

The predictive CLV model helps you identify your most valuable customers, the products and services that bring in the highest and most profitable sales, and ways to increase customer retention.

Historic Customer Lifetime Value

The historic CLV model uses past data to predict the value of a customer. It does not take into account whether the existing customer will or won’t continue buying from a company.

With the historicl model, the average cost of an order is central to determining the value of your customers. This model is helpful if most buyers only engage with your business for a limited period.

Be aware: Because customer journeys differ, this model comes with drawbacks.

  • Active customers, which the historic model deems valuable, might become inactive and skew your data.

  • Inactive customers could begin buying from your business again, and you might overlook them because they're considered inactive.

If you’re unsure which method to use, consult a bookkeeper or accountant. Selecting the right one could have a significant positive impact on your business. The wrong one could be costly to your bottom line.

Calculating Customer Lifetime Value

The formula for CLV is relatively simple.

Customer Lifetime Value = (Customer Value * Average Customer Lifespan).

To find CLV, start by multiplying the average purchase value and the average number of purchases — this yields the customer value. Once you calculate the average customer lifespan, you can multiply that by customer value to determine customer lifetime value.

Determining CLV and tracking it over time is relatively simple and can significantly benefit your business.

We hope this article gives you the jumpstart you need to begin identifying your most valuable customers and targeting similar audiences so you can build up your ideal customer base.

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