At this time when we focus so much on the growth of our marketing while trying to figure out how to manage our digital footprint, we often forget about one part that is necessary to be successful long-term. That part is understanding our customer's lifetime value.

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It is an amazing and sustainable growth metric, which can very easily change all of your marketing efforts and future projections. Let's quickly learn how to leverage it…

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What is lifetime customer value?

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Lifetime customer value, shortened LCV, can be understood as a projection of the amount of revenue that will be generated by a customer during the duration of their relationship with your business. So your goal is to understand how long this relationship should be and how to maximise the revenue during it. It brings you a long-term perspective not just the first purchase but every single interaction in the future. 

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Take in examples like Apple, Amazon, Facebook etc., they are trying to make the relationship last forever and maximise their revenue in many different ways. 

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So you bought your first iPhone. Now the real deal starts. Apple does everything it can for you to love their ecosystem of products. I bought an iPhone as well. Now I have a Mac, iPad, AirPods and in terms of watches I just prefer analogues. Not saying that they have X amount of other products such as Apple TV that they can leverage. And I will, most likely, be an Apple customer till forever because they are doing a great job at understanding the power of lifetime customer value. 

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How to calculate lifetime customer value (LCV)?

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There are no complicated formulas, it mostly depends on the product reach of the company.

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The formula is…

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LCV = Average Purchase Value x Purchase Frequency x Customer Lifespan

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So for example for Apple:

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Average Purchase Value can be around: 900€

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Purchase Frequency can be: 0.8 per year

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Customer Lifespan: 12 years minimum

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So then: 

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LCV = 900 x 0.8 x 12 = 8640€ 

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(These are rough data that might be totally out of the way, Source: Damian's head) 

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Why does LCV matter so much?

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Understanding LCV gives you so much more than just a number. If you are going for the long-term it might change a few parts of your business plan…

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Make smarter decisions in marketing

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Knowing what your LCV is can hugely change your budgeting and eventually your growth. Let's say that now you are focused on the initial purchase and so your maximum customer acquisition cost is 700€ and this forms your marketing budget.

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Now, if you know that your LCV is 8640€, you can raise your maximum customer acquisition cost and increase your marketing budget which then accelerates your growth and competitiveness on the market. 

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So understanding LCV brings a huge value to your overall growth if managed well.

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LCV makes you focus more on retention

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Focus on retention more than acquisition. Try to build a fan base, so people go crazy when you release a new product. You might be selling air conditioning, that's true, still try to make customer satisfaction a priority.  

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If your customer is satisfied it will prolong your relationship, increase the average purchase value and increase the purchase frequency. This will have a huge impact on your LCV.

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So understanding LCV makes you more focused on customer satisfaction, loyalty and retention.

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Sustainable long-term growth

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I'm not the one to teach here so far but it is obvious that the most successful companies are the ones focusing on being amazing long-term. LCV is a very important part of recurring revenue which is a core concept of sustainable business. 

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This is one of the first things that is looked at by investors, VCs, PEs, banks etc. They want to know if the company has sustainable recurring revenue, good CLV/CAC ratio (Customer Lifetime Value vs. Customer Acquisition Cost) and is built to last and grow.

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So no matter if you want to sell the company or manage its debt to your liking, and so the growth, it is important to understand the LCV. The concept of a bigger concept.

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How to increase LCV

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The ways of increasing LCV are again very individual but here are a few ideas to remember:

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Great onboarding and first impression 

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Good first impression gives the client the perception of your company, makes sure it's right and it increases the chance of the client sticking with you longer.

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Customer service must be on point

Products and services do come with problems. Make sure you solve them quickly and that your customer is happy and feels his/hers importance.

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Loyalty programs 

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Make customers feel appreciated. 

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For example: Oh! You've been with us for a year! Here's a three-month subscription to a better service for free. Great way to make your customer feel appreciated and you can easily upsell them later.

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Upsells and cross sells 

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Respectfully, let both sides benefit.

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Build community/fan base 

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As I said earlier, try to build a community. Engage with your customer both through social media and in real life. Try to build a personal brand. Customers will stay much longer with another human than with a company. (Yes unfortunately not all businesses can build communities, but if you can, it's worth it.)

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Feedback, feedback, feedback

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Make sure to get high quality and regular customer feedback. This is a great way to make sure that your products are satisfying your customers and your customers are still planning to stick with you long-term.

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Some final thoughts

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Applying LCV into your business might change your business plan and marketing budgets a little bit but it is a very important concept to understand. Huge Fortune 500 companies are the masters of this and it's part of what makes them great. 

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I really hope that this short blog gives you a new perspective and will help you grow your company.

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Thank you for reading,

Damian from Visio.

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