When your goal is to grow your business, there are a number of metrics you’ll want to track. However, customer lifetime value is arguably one of the most important -- and one of the most overlooked. While your focus may be on how to bring new customers in, you may be ignoring the importance of keeping your existing customers around. By understanding how to calculate lifetime value of a customer, you’ll have a clearer picture of how much you should be investing in both acquisition and retention.

At Semify, we believe that growing together creates the freedom to do more, have more, and be more. That means we’re invested in ensuring our customers are successful and that they have a great experience with us. For us, it’s essential to delve into LVC in order to better understand our clients and to build our relationships with them over time.

For your agency or small business, tracking lifetime value is critical, too. But if you’re not exactly sure what customer lifetime value is or you don’t know how to calculate lifetime value of a customer, we’re here to help. By the end of this post, you’ll understand what LVC is, why it matters, and how to use our customer lifetime value calculator to track this metric for yourself.

What is Customer Lifetime Value?

First, let’s discuss what customer lifetime value is. At its core, LVC (sometimes referred to as customer lifetime value, or CLTV) tells you how much money a given customer will spend with your business throughout their time with you. To put it another way, it’s the amount of revenue you can expect a single customer to generate during the course of their relationship with your business.

Of course, the longer the relationship is, the more you can expect a customer to spend. A higher LVC typically indicates that a customer loves and exhibits loyalty to your brand. When a customer has a lower LVC, however, that could show that they’re more likely to churn or that you’re targeting an audience that isn’t translating to sustainable revenue for your business. We’ll get into why this matters a bit later in the post, but suffice it to say that this metric can reveal quite a bit about customer behavior and what you need to focus on in terms of marketing and sales.

Is Customer Lifetime Value Different From Customer Acquisition Cost?

Customer acquisition cost, or CAC, does differ from LVC -- but these two metrics are related.

CAC refers to the amount of money your business has to spend (in sales and marketing expenditures) to earn a brand new customer within a certain timeframe. These expenditures can include anything from advertising and marketing spend to things like salaries and commissions paid to your staff.

Not surprisingly, businesses want to do everything possible to reduce customer acquisition costs, as this can help your company’s bottom line while ensuring that sales and marketing programs are working as efficiently as possible.

You may have heard the adage that it takes more money to earn a new customer than it does to keep an existing one around. This is actually true! Experts say that it can cost up to five times as much to acquire a new customer as it does to retain a current customer.

Reducing your CAC is just one part of the equation. You’ll also want to compare this figure to your LVC metric to assess how long it actually takes to recoup those expenses upon earning a new customer. With that in mind, you can focus on attracting high-value customers -- and keeping them around for the long haul.

Why Should You Calculate LVC?

By now, you’re probably starting to understand why LVC matters. But it’s important to note that you can’t simply take a wild guess at what your customer lifetime value might be. You actually need to calculate lifetime value of a customer for yourself using a proven LVC tool like a customer lifetime value calculator.

In this case, the math does matter. You need to know exactly how much revenue a customer is likely to bring in over the course of your relationship. While things can certainly change over time (due to anything from poor customer service to an increase in their budget), this figure can give you a much clearer idea of where your client stands.

Understandably, you’ll want to use this information to nurture those high-value relationships in order to retain your most important customers. And on the flip side, you can use LVC to figure out which customers are less likely to become repeat customers. Knowing this information can help you make up potential losses (sometimes before they even occur!). Using a customer lifetime value formula for marketing could allow you to reconfigure the kinds of clients you’d like to acquire in the future in order to reduce customer churn and ensure you’re spending your advertising dollars wisely.

How Can Knowing Your LVC Help Your Business Grow?

Every business owner wants a well-oiled sales machine. When you have a customer lifetime value formula for marketing and sales purposes, you can make better use of your resources and make proactive decisions that result in better customer relationships.

Using a customer lifetime value calculator and determining your customer acquisition cost can allow you to bring qualified leads in more consistently and keep those customers around for a longer period of time. You’ll know where to invest your resources (and where not to spend them) in order to facilitate greater returns.

Ultimately, you’re going to have trouble growing your business if you’re dealing with high rates of customer churn. You’ll have to spend all your time chasing leads that may or not be a good fit. You may not even have the insight necessary to spend the right amount on advertising or know how much you need to invest in your sales team. When you know how much the average customer (or even a specific customer) spends with your business, you can then use that information to figure out a better strategy that will be truly profitable in the long term. After all, you can’t figure out the right direction for your business if you don’t know where you are now!

How Can You Calculate LVC?

With that in mind, the next step is to learn how to calculate lifetime value of your customers. Any good customer lifetime value calculator will likely require a few different metrics to determine your specific LVC. You can also gather these figures to perform calculations on your own -- but that can quickly become overwhelming.

Fortunately, there are a number of LVC tools available that can help you make these calculations. Even better, these tools may be free for you to use, which makes this process even more accessible for your business.

Our customer lifetime value calculator automatically determines your LVC with just a bit of information from you. When using our customer lifetime value formula for marketing and sales needs, you’ll need to plug in your monthly figures for customer churn percentage rate, customer lifespan, median customer invoice, the average number of new customers, and any marketing and sales costs. From there, you can use our free LVC tool to calculate lifetime value of a customer, as well as the ratio between that figure and your customer acquisition cost.

Using a customer lifetime value calculator is a relatively simple process, but it’s an incredibly important one for the growth of your business. Because we believe so strongly in growing together, we’ve provided our LVC tool for you to use free of charge. It’s our hope that by gaining this crucial insight into your business, you’ll have the data you need to make the right decisions, nurture those customer relationships, and get more out of your marketing and sales spend.

How Can LVC Be Improved?

Once you know how to calculate lifetime value of a customer, you might be wondering what you can do to improve that metric. In order to increase the amount a customer spends over time, you’ll want to focus on a few key areas.

  • Focus on Customer Service: As we mentioned earlier, it’s far more cost-effective to maintain existing customer relationships than to acquire new ones. So how do you keep customers around? One of the most tried-and-true ways is to provide exemplary customer service. At Semify, we pride ourselves on our quick response time and our commitment to scheduling calls on both a regular basis and during more urgent situations. Our ongoing involvement and support set us apart from the competition, according to our own clients. Not only do you need to be available and accessible, but you also need to make an effort to foster these relationships even when there isn’t an emergency. When a customer knows they can trust you to get the job done, that goes a long way in building their loyalty. That, in turn, can convince them to stick around and even increase their budget over time.
  • Solicit and Implement Feedback: You may know that your customer churn is high, but do you know why your customers are leaving en masse? If the answer is no, you could probably use some data. At Semify, we take feedback seriously. We use Net Promoter Score (NPS) surveys from our clients each month to assess their satisfaction and use a variety of other means of feedback solicitation -- including surveys, calls, and even innovation -- to improve our processes. Even online reviews from customers can be a great source of actionable feedback. Our aim is to get the customer in the room, as Eric Ries tells us in The Lean Startup. Once you receive that feedback, of course, you’ll want to use it to address the issues that lead to customer churn and overall customer dissatisfaction. If you’re able to crack the code and make a real change, this can have a major impact on your customer lifetime value.
  • Remarket to Existing Customers: Acquiring new customers will always be part of your business, but you can’t afford to ignore the ones you already have. By increasing the amount of time they spend with you, you’ll have positive effects on LVC. That means that you need to keep these customers engaged even when they aren’t experiencing issues. Remarketing through email blasts, special offers, and even digital ad campaigns can keep current customers interested in your products or services while keeping your brand at the forefront of their minds. Not only will this remind them your business is there for them, but you’ll also have an opportunity to upsell your customers to address the goals or challenges they may have. In the end, this keeps them around for longer and increases the amount they’ll spend.

Now that you know the importance of LVC, how to use our customer lifetime value calculator, and what you can do to improve your lifetime value rates, you’ll be in a great position to scale your agency this year. For more on how we can grow together, please contact the Semify team today.