Surely you've heard that it's easier to keep a customer who already has to get a new one. Most companies focus on constantly getting new customers, but leaving out doing business with those they already have. Hence the importance of customer experience and customer loyalty.
According to a study conducted in the United States by the firm Arya Systems, more than 75% of senior executives say that CLTV is a very valuable indicator for their companies.
What is Customer Lifetime Value (CLTV)?
CLTV stands for Customer Lifetime Value or the lifetime value of a customer in Spanish. It is a metric that indicates the benefit generated by a customer throughout their relationship with our company company.
Customer Lifetime Value has become one of the most relevant metrics to consider in order to approach a quantification of customer loyalty. As the current trend is pivoting towards the creation of new experiences that generate emotions, and in this way customers remember us for a longer time, CLTV becomes even more relevant, as we will see later.
How is CLTV Calculated?
Before we start with an example, we need a number of metrics. Suppose that we have an e-commerce that sells suits for people who work in banking and we have the following data:
- Average ticket: 150 dollars.
- Gross margin: 50%.
- Time of stay: 10 years.
- Times you are going to repeat: 1.
- Time unit: years.
- CAC (Cost per acquisition).
To obtain the data, we multiplied all those data with the exception of the CAC. CLTV = 1500.51011 = 750 dollars. This is what this customer will bring us throughout their entire life cycle with us.
To understand this correctly, we need to add another metric: Cost per acquisition or also known as CAC. This metric allows us to see how much we have spent on the different recruitment strategies compared to the customers obtained, as follows:
CAC = (Marketing Expenses)/(Number of customers obtained). If, for example, we have spent 10,000 dollars in recruitment strategies in marketing and we have obtained 150 customers, our CAC will be 66.6 dollars.
For a business to be profitable, it is said that the CLTV must be greater than the CAC multiplied by three:
CLTV > 3xCAC and in our example, 750 USD > 199 USD, so using our example of the costume company our business is very profitable.
How Can I Improve My CLTV?
To improve and optimize our Customer Lifetime Value for all customers, we need to offer each of them the best possible experience throughout the entire cycle of interactions with our brand.
This is where customer experience plays a crucial role throughout the Customer Journey of your client. If we analyze all the Tounchpoints that customers have with our company, we can find pain points where to improve your experience.
If we manage to exceed the expectations of our customers throughout the customer journey, We will increase the probability of increasing the average ticket, recommend us or simply that it will be more recurring over time.
This is why it is so important for companies to keep in mind strategies and methodologies in customer experience management to achieve happier, more loyal customers, and this ultimately increases the CLTV ratio and, consequently, an increase in the financial results of our company.
Optimize your Customer Lifetime Value! Learn how to build customer loyalty and increase your revenues. Consult with our Izo experts and transform your customer experience strategy.
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