Customer Lifetime Value (LTV): How to calculate it & why it matters

Customer Lifetime Value (LTV) is one of the most important—and overlooked—small business metrics that impacts profits and helps shape your marketing budget and strategy. Simply defined, customer LTV is the amount of money a customer will spend at your business in their lifetime.

Too many businesses funnel money toward trying to acquire new customers, and focus on what’s far more important—retaining customers. After all, keeping an existing customer costs significantly less than the cost of acquiring a new one. Why? It’s easier to sell to existing customers who already have a relationship with your business. Selling to a complete newbie requires much more effort just to get them in the door. So once you do get a new person in the door, it’s better to spend your time and money on retaining them.

Consider this: A mere five percent uptick in customer loyalty can boost profits by as much as 95 percent, according to Harvard Business School. Your regulars are not only more inclined to try new products, they also spend more per transaction than new customers. You are 60 to 70 percent more likely to sell to an existing customer, compared to the low 5 to 20 percent probability of selling to a newbie. In other words, your profits will benefit when you stay faithful to the faithful.

How do I identify LTV?

There are a number of methods for calculating this metric, but here’s one:

Average customer LTV = Average customer value per year ✕ average customer lifespan

More specifically:

Average customer LTV = Average customer value per year (visits per month ✕ average spent per visit ✕ 12) ✕ average customer lifespan.

Let’s apply this equation to a real-life scenario. Imagine you run a popular neighborhood bar and grill that caters to 20-somethings. Your average customer drops by the bar twice a month and spends about $30 per visit on drinks and food.

Average customer value per year = 2 visits per month ✕ $30 spent per visit ✕ 12 months = $720
Average customer lifespan = 10 years

Average customer LTV = $720 ✕ 10 = $7,200

This figure gives you the big-picture view of how much the average customer spends in their lifetime, and it helps guide your marketing decisions. For example, it’d be a waste to spend $8,000 on advertising if it only leads to one new customer. On the other hand, if you spend $100 to acquire a new customer and they only spend $60 that first month, don’t consider this a loss; remember their lifetime value is around $7,200. Focus on keeping these customers happy and returning for more.

Download your LTV worksheet here: Customer LTV Worksheet

Interested in boosting your customer LTV? Bump up any of the numbers in this equation. Here’s how.

1. Bump up the amount spent per visit

Find creative ways to increase your average customer’s amount spent per visit. Going back to the bar and grill example, if this figure increased by even $5, you’re looking at a $1,200 increase in your average customer LTV.

2 visits per month x $35 spent per visit x 12 months x 10 years = $8,400

This makes for a more than 16 percent boost in average customer LTV. So how do you squeeze out that extra amount per visit?

Cater to your customers

To achieve this boost, you’ll need to learn about your customers and personalize your offerings to their tastes. Strike up conversations, offer discounts for filling out a survey or connect over social media so you can get to know them, and offer relevant products to them. Maybe they’re willing to pay a premium for craft beers or organic grass-fed burgers.

Get the word out

Great marketing and on-point communication is key to making these personalized touches a hit. If your customers don’t know about it, they won’t shell out the extra green for it. Be sure to highlight these items in your product marketing, whether that’s through your email list, a snazzy social media campaign, the signage outside your establishment, or something your staff hypes.

2. Increase frequency of visits.

In addition to boosting the amount spent per visit, you can also increase customer LTV by increasing the number of visits customers make. The key is cultivating such a positive relationship with them that they want to come back for more, much more.

Returning to our bar and grill example, let’s say you’re able to get your customers through the door for one extra visit every other month. So, for the sake of working from the original equation, they go from visiting 2 times per month to 2.5 times per month, and they still spend about $30 per visit. Here’s how that bumps up your average customer LTV.

2.5 visits per month x $30 spent per visit x 12 months x 10 years = $9,000

You’ve just raised your average customer LTV by $1,800, or 25 percent.

Let’s dig into strategies that can help you reach this goal.

Engage and re-engage

Again, understanding and communicating with your customers is key to building brand loyalty. Maybe you run a restaurant that your customers love, but they’re too busy to come in for more sit down meals. Consider offering takeout, delivery, or online ordering—these are great ways to get extra sales and retain loyal customers. (Here are some tips for doing this successfully.) You can also offer loyalty programs like Clover Customer Engagement, which can incentivize customers who already love your products to come back more frequently.

Make it easy

No matter your field of business, it’s important to remove obstacles that stand between your customer’s initial interest and the close of their sale. Make spending money at your business easy by giving customers the best user experience and top-notch service. For example, if you’re a restaurant that serves the professional lunch crowd, make it easy to split the bill among groups. Serving food that’s suitable for a quick mid-day meal and streamlining the customer experience will go a long way towards developing more loyalty.

* This post first appeared in the official Clover blog on July 26, 2018