Customer Lifetime Value: Everything You Need to Know

By Badger Maps

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What is the value of a lead? Data shows that a lead’s value goes well beyond that first sale

In fact, a recent survey found that  61% percent of SMB revenue comes from repeat customers. This is why businesses find it hard to calculate the true ROI of their lead generation expenses.

While it’s simple to calculate the lead generation cost on a single sale, that really doesn’t give you the whole picture.

In order to get a clear understanding of lead generation ROI, you have to compare it to your average customer lifetime value.

In this blog, we’ll explore:

  • What customer lifetime value is
  • How to measure customer lifetime value
  • Why it’s important to understand ROI 
  • How to maximize ROI with your customers

What is Customer Lifetime Value?

Simply put, customer lifetime value (CLTV) is the amount of money a customer will bring your company throughout their entire time as a paying customer.

For example, if you only ever make one sale to a customer for $4k, their CLTV is $4k. However, if you make 10 sales to a customer at $4k/month over ten months, their CLTV is $40K.

How to Measure Customer Lifetime Value

Customer Lifetime Value Formula

Luckily, you don’t need to be a mathematician to calculate CLTV. It’s actually quite simple!

In order to find a customer’s average CLTV, you can use this formula:

CLTV = Order value x purchase frequency x customer lifetime.

So if you sold a product for $200 to a customer each month for 5 months, their CLTV would be $1,000.

If you’re trying to figure out the average CLTV for all your customers, the formula is:

CLTV = Average order value x average purchase frequency x average customer lifetime

This will give you an idea of what your customers are worth to your company over the entire duration of your business relationship.

Once you’ve calculated your CLTV, it’s time to see how that impacts the ROI of your lead generation.

Understanding Lead Generation ROI with Customer Lifetime Value

Let’s say your company is interested in outsourcing lead generation to a third party and you want to calculate an appropriate budget. You might be tempted to use a formula like this:

Lead Generation Service: $2k per month

Sales generated: 10

Total sales: $5K

ROI: $3k

 

However, let’s say on average you receive $20K from your customers over their lifetime. Your formula should really look more like this:

Lead Generation Service: $2k per month

Sales Generated: 10

Average CLTV: $20K

ROI: $198,000

 

And if you contract a B2B lead generation service for 6 months and they bring 10 sales per month, it’s even more lucrative:

Lead Generation Service: $2k per month x 6-months = $12,000

Sales Generated: 60

Average CLTV: $20K

ROI: $1,188,000


That’s a huge difference! 

Only examining the initial costs of outsourcing lead generation – without weighing it against customer lifetime value – misrepresents your ROI.

And that’s just the first step! Studies show that it can cost 5 times more to acquire new customers than to keep your current ones. So your lead generation ROI will actually decrease with each lead you acquire.

How to Maximize CLTV with your Customers

Maximizing CLTV is one of the easiest ways to generate revenue.

Let’s look at a few proven ways to build CLTV and bring your customer base up to its full potential:

Upselling

If you want to increase CLTV, start by increasing your customer’s average order value (AOV). 

A lot of companies do this by upselling, a sales technique that drives customers to purchase more expensive items, upgrades, or other add-ons to generate more revenue.

Upselling works across every company that has product tiers, and it is very easy to implement in your business strategy.

Cross-Selling

Cross-selling is the practice of selling an additional product to an existing customer. This method can be used in place of, or in addition to, upselling to increase AOV.

This method works best when you cross-sell items that compliment or enhance the core product in some way.  Let’s say you are buying a new car. The dealer may try to cross-sell you a warranty. And in addition to that, they may try to upsell you on a better trim.

Boosting the Frequency of Transactions

The frequency of your customer purchases may depend on the type of product you’re selling. 

Obviously, a car salesman wouldn’t try to sell their customers a new car every week! However, if you’re in retail, boosting transaction frequency is a great way to increase CLTV. There are several ways to encourage this through marketing campaigns and advertising. Just make sure you’re capturing as much information about your customer as possible to target your campaigns appropriately.

Keeping the Business Relationship for a Longer Time Period

Keeping your customers for the long-term is another sure-fire way to increase your CLTV. 

The way you retain your customers is going to depend a lot on your product and industry. However, there are a few timeless and proven ways to keep your customers in any industry:

  • Stay in touch
  • Deliver value
  • Offer outstanding customer service
  • Welcome their feedback
  • Improve your product/service continuously 
  • Award loyalty (which we’ll discuss in more detail below)

Customer Loyalty Programs

Rewarding loyalty is another great way to retain customers. Loyalty programs build trust—and trust means sales

77% of consumers say that a good customer loyalty program makes them more likely to stick with a brand and purchase more from one specific company.

Retaining customers increases customer retention rates by 5%, and increases profits by 25% to 95%!

Some of the best loyalty programs convert dollars to points and operate on a tiered system. When customers spend above a certain amount, they upgrade to a new tier. The higher the tier, the better the rewards.

If you’re looking to start a customer loyalty program to increase CLTV, there are a few best practices to keep in mind:

  • Make the program easy to join: 53% of customers said they only signed up for a loyalty program because it was easy to join
  • Make it easy to claim rewards
  • Reward customers based on their loyalty level: more rewards the longer they are retained or the more they spend
  • Make rewards attractive to customers: examples include discounts on a future purchase and free shipping
  •  Promote your loyalty program to current customers, but don’t constantly pressure them to join
  • Utilize strategic partnerships: 70% of consumers like programs that partner with other brands to increase ways to earn loyalty points

Outsourcing Lead Generation

Outsourcing lead generation is a great way to access more qualified leads, improve your close rates, and still keep salespeople focused on nurturing those leads and enhancing CLTV – which increases your ROI. 

Conclusion

Leads are more than meets the eye – instead of thinking of just that first close, think of how leads can potentially bring you high customer lifetime value. 

Remember that Customer Lifetime Value is the amount of money a customer will bring your company throughout their entire time as a paying customer. It’s calculated with the following formula: CLTV = Order value x purchase frequency x customer lifetime.

There are various ways to increase your CLTV, such as upselling, cross-selling, boosting transaction frequency, and customer loyalty programs.

Customer lifetime value is the most accurate way to calculate your lead generation ROI. One additional way you can enhance CLTV is by outsourcing lead generation to experts who can access more qualified leads and improve your close rates. This way your salespeople can stay focused on nurturing those leads and increasing your CLTV.

Author’s Bio: Michael is a member of the editorial team at Leads At Scale. His main areas of expertise include business growth, inbound, and outbound marketing & sales. He is a walking wanderer and a travel enthusiast.

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