Our Guide to CLTV
The Importance of Customer Lifetime Value (CLTV) in Digital Marketing
Marketers love to speak using acronyms. ROI (return on investment), ROAS (return-on-ad-spend), AOV (average order value), CPC (cost per click) – agencies will make constant reference to such metrics when talking to clients or publishing their success stories online.
In comparison, customer lifetime value (CLTV or CLV) is a metric that receives far less airtime, despite arguably being the most important of the lot. This blog will aim to show you why by answering the following questions…
- What Is CLTV?
- How do I calculate it?
- Why is it important?
- How do I improve it?
What Is CLTV?
CLTV refers to the average revenue a business can generate from a single customer over the entire lifetime of their account. It is a numerical way to measure the loyalty of your customers and the value they provide to you. In turn, it is one of the most important metrics for predicting the long-term success of your business.
How to Calculate Your CLTV
To calculate CLTV, you need to determine:
- The average purchase value of a customer
- The average number of purchases a customer makes per year
- The average customer lifespan
Then, multiply these three figures together to get your CLTV!
For example, if the average order value (AOV) is £50, the average number of purchases per year is 2, and the average customer lifespan is 5 years, the CLTV would be £500.
The Importance of CLTV
CLTV is crucial to helping businesses make informed decisions about their marketing efforts. If you know your CLTV, you should know exactly how much to spend on your marketing efforts to acquire new customers.
If the cost to acquire a customer (CPA) was £30 – even if they only spent £20 initially – then the £500 that they will go on to spend with your brand makes this initial cost worth every penny. This is something that would only be apparent when you factor in CLTV! Understanding CLTV will help your company allocate resources appropriately to maximise the long-term value of your customer base.
Unfortunately, many marketers and business owners do not understand the importance of CLTV, instead falling into the ROI/ROAS trap e.g. “We need to get 4X ROAS every month by x date or we’ll need to stop advertising.”
ROI and ROAS can be extremely misleading when examined without also considering CLTV. They only focus on the immediate value of a customer and, in turn, do not account for the long-term potential of the customer relationship. This can lead to an emphasis on short-term gains rather than building (extremely profitable) long-term customer relationships.
However, ROI and ROAS are still very valuable and important metrics. It’s just that the two should not be considered in isolation, but the same applies to CLTV. All these metrics must be considered in conjunction with one another to paint a complete picture of the value and potential of a customer relationship.
UX Design: The Key to Improving Customer Loyalty
One of the most effective ways to boost your CTLV is to improve your website’s user experience (UX). UX refers to the overall experience that a person has whilst using your website. In other words, how easy and enjoyable your site is to navigate and interact with.
The causal connection between improving your UX and CLTV can be explained via a simple analogy…
If you go to a restaurant for the first time and spend £200, you’ll be returning based on customer experience. That means good food, friendly staff, easy parking, or whatever else is high up in your criteria will determine your CLTV. Meanwhile, if the restaurant clearly doesn’t care about the food quality or hiring friendly staff, they may still get your initial £200 but – crucially – they would lose out on you (and many others) becoming a repeat customer.
Good customer service in the real world is equivalent to an online business providing good UX, primarily because both are the deciding factor in producing happy customers. When it comes to an eCommerce site’s UX, people will return based on fast load time, engaging product pages, and a smooth checkout process. These factors will all contribute – both consciously and subconsciously – to their decision to return in the future!
Start Building Long-term Customer Relationships
Every business must aim for lifetime customers, not short-term return on investment. Keeping track of your CLTV and constantly looking for ways to improve it will help you do so.
Trafiki is an eCommerce marketing agency with years of experience in building loyal customer bases and, therefore, helping businesses grow into household names. Arrange a FREE 30-minute consultation with one of our experts and find out how we could help take your business to the next level!