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Customer value: definition, measurement and optimization

The value of the customer is a crucial variable in any marketing strategy. This concept allows companies to identify which of their customers bring the greatest long-term profitability, thus optimizing their resources and strategies. In this article we will address the following key points:

  • Definition of customer value and its importance.
  • Customer Lifetime Value (CLTV) calculation methods.
  • Factors influencing CLTV.
  • Strategies to increase customer value.
  • Impact of customer experience on CLTV.
  • Main KPIs to measure CLTV.
  • Conclusions on the importance of optimizing this metric.

 

What is customer value and how important is it?

Customer lifetime value, better known as Customer Lifetime Value (CLTV), is a fundamental marketing metric that estimates the total revenue a company can reasonably expect to earn from a customer over the entire duration of its business relationship.

This value does not look at a single transaction, but considers both the revenue generated by the customer and their expected lifetime with the company. A detailed understanding of customer behavior enables companies to tailor their marketing strategies to maximize CLTV, thus ensuring a more profitable and lasting business relationship.

In addition, customer service teams play a crucial role in influencing the customer journey, contributing to the improvement of this metric and, consequently, to the optimization of 360º Marketing strategies.

Why is it so important?

Because not all customers generate the same value. While some may make sporadic purchases, others become frequent users who generate a high return on investment (ROI). Therefore, focusing solely on lead volume is not always effective if they do not result in valuable customers.

The Customer Lifetime Value (CLTV) is crucial to maximizing a company’s performance because it provides a clear view of the economic value that each customer can bring during their relationship with the company. Here’s why it’s so important:

  1. Revenue optimization: eCLTV allows us to identify the customers who generate the most revenue and tailor offers and strategies to attract these valuable customers. By focusing on increasing CLTV, we can increase overall revenue by keeping high-value customers buying.
  2. Building loyalty and retention: knowing this metric helps to detect potential problems in customer satisfaction. If CLTV is low, it is a signal to improve customer service strategies and loyalty programs, which in turn can increase loyalty and retention.
  3. Reduced acquisition costs: Retaining a customer is often much cheaper than acquiring a new one, with acquisition costs that can be up to five times higher. By focusing your efforts on nurturing valuable customers, you can reduce acquisition costs and improve profit margins.

In summary, measuring and optimizing CLTV not only helps maximize revenue and improve customer retention, but also contributes to a more efficient and less costly strategy for attracting and retaining customers.

 

 

How is customer value calculated?

 

The basic formula to calculate it would be as follows:

CLV = Average purchase value × Frequency of purchase × Duration of relationship.

Multiply the average value of a purchase by the number of purchases a customer makes per year, and then by the number of years that customer is expected to continue buying.

Now, in order to know these metrics, we must perform the following calculations:

  • Average purchase value= Total revenue in a period of time % number of purchases in the same period of time
  • Frequency of purchase: Number of purchases in a period of time % number of unique users who made purchases in the same period of time
  • Duration of the relationship: Total number of years that your company’s clientele remains active % number of unique customers

Let’s talk about the most common methods for calculating Customer Lifetime Value (CLTV): the predictive model predictive model and the historical model.

  • The predictive model performs analysis through regression (statistical predictive analysis) or machine learning to forecast future customer behavior, identifying the most valuable customers and optimizing retention and sales in real time.
  • The historical modelThe CLTV, on the other hand, is based on past data, such as the average value of orders, to calculate the CLTV without predicting future behavior. Although it is more accessible and common, it does not anticipate changes in the customer-company relationship, which can distort the results.

What factors impact customer value?

Customer Lifetime Value (CLTV) can be affected by a variety of factors, ranging from frequency and value of purchases to customer loyalty and customer experience. Here are some of the most influential factors:

  1. Purchase frequency: the number of times a customer buys during their relationship with the company.
  2. Average transaction value: the amount spent by the customer on each transaction.
  3. Duration of the relationship with the customer: the more loyal the customer, the higher the CLTV. Factors such as customer satisfaction and service quality are determining factors in maintaining long-term relationships.
  4. Cost of customer acquisition: if the cost of acquiring new customers is high, it can reduce the positive impact of CLTV.
  5. Customer retention: The ability to retain customers is crucial. Companies with high retention rates tend to have a higher CLTV, since recurring customers generate constant revenue without the costs associated with acquiring new ones.

Optimizing these factors will help maximize CLTV and, therefore, improve long-term profitability.

 

 

What strategies do we recommend at Boomit to increase customer value?

From Boomit, as a performance marketing agencywe propose a series of strategies that help maximize the CLV of our clients:

  • Optimization with Machine Learning: by using machine learning, we optimize advertising campaigns to maximize return on investment (ROI). In addition, we can identify behavioral patterns and segment customers more effectively, favoring retention and increasing the long-term value of each customer.
  • Performance-driven advertising: By focusing on key metrics such as cost per acquisition (CPA) and return on advertising spend (ROAS), we ensure that every dollar spent on advertising generates the maximum possible value. This precision helps generate more valuable customers and improve their lifecycle in the business.
  • Retargeting: remarketing remarketing strategies allow us to stay in touch with customers who have previously interacted with a brand, encouraging them to return and make further purchases. This helps to prolong the relationship with the customer and increase their lifetime value.

Why is customer experience so important?

Customer experience is one of the main factors that directly impacts CLV. A satisfied customer is more likely to return, make repeat purchases and recommend the company to others. Investing in improving the customer experience – through responsive support, user-friendly interfaces and quality products/services – helps increase both loyalty and CLV.

In addition, customer experience affects not only retention, but also upselling and cross-selling. A customer with a good experience is more open to discover and purchase other products from the same company.

What KPIs to use to measure customer value?

Next, let’s review the most important metrics:

  • Average purchase value: measures how much a customer spends on average on each purchase.
  • Purchase frequency: calculates how many times a customer makes a purchase in a specific period.
  • Retention rate: measures the percentage of customers who continue to purchase after their first purchase.
  • Gross margin: allows us to understand how much of what a customer spends contributes to the company’s net profit.
  • Customer acquisition cost: this is fundamental to evaluate the return on investment in each customer and adjust the acquisition strategy.

Conclusion

Customer Lifetime Value is an essential metric that allows companies to understand which customers generate the most value and, therefore, justify the investment in their acquisition and retention. At Boomit, we recommend focusing on the quality of leads and offering personalized experiences that generate loyalty, which in the long term increases CLV. In addition, having a solid strategy and an accurate measurement system is vital to optimize this key metric.

Mai Mejias

Mai Mejias

Content Manager | Boomit. Creatividad con foco en Performance. Me apasiona contar historias que conecten marcas con audiencias.

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