How to Calculate Customer Lifetime Value
To succeed as a subscription or recurring revenue enterprise, you need to adopt a customer-centered approach. Instead of focusing just on the acquisition of new business, you have to prioritize retaining and nurturing existing customers.
This is because the digital transformation of business has greatly increased customer fluidity and lowered the revenue value of the first purchase. In this new market, recurring revenue is ultimately more valuable than new revenue. Instead of judging success according to just the ebb and flow of new business, enterprises have to take a long-term view and work out how to calculate customer lifetime value.
Calculating Customer Lifetime Value
Customer lifetime value is the total amount a customer will spend if you retain them. To accurately evaluate the net benefit over time, you need to factor in the cost of acquiring the customer and the cost of serving their needs throughout their journey.
As an equation, it looks like this:
Customer Lifetime Value = Customer Revenue – the Cost of Acquiring and Serving the Customer
You can increase customer revenue and reduce the cost of serving them by adopting customer success best practices that increase the value customers derive from the product. By consistently delivering value and staying in close contact with customers, you strengthen customer loyalty and reduce churn.
Maximizing Customer Lifetime Value
Realizing the maximum potential customer lifetime value depends on your ability to continuously deliver value. Doing so requires a firm understanding of your customer and their business goals. With that knowledge in place, you can initiate a number of strategies to better deliver value.
Optimize Customer Onboarding
Onboarding is about accelerating the customer’s time to value. Aim to create the shortest possible path between basic product knowledge and its use to realize the customer’s business goals. That means focusing on the integration of the product into the customer’s workflows. Educate the customer on all elements of the product with a special focus on the features you know will help them achieve their goals.
It is important to acknowledge and respond to the many questions customers are likely to have during this transition phase. Responding to Voice of Customer information has a strong correlation to building customer loyalty, and feedback can help you optimize standard onboarding practices for future customers.
While it is important to quickly answer customer questions, you can create a more productive onboarding experience by proactively analyzing the customer experience and engagements. For instance, are there bottlenecks that are slowing down the process or causing customers to struggle with training? Being proactive with your analysis of the customer experience can help create a smooth process for current and future customers.
Track Milestones and Events Over Time
A customer exits onboarding once they can use the product independently—the first of many milestones that define the customer journey. Clearly marking and celebrating these milestones promotes a sense of momentum and helps the customer visualize ROI. Such milestones and events should be results-oriented, such as achieving complete license utilization or decreasing the number of support tickets opened during onboarding. By tying them to direct action, like regular team-wide reviews of new feature adoption.
It also helps streamline the customer journey so that the focus remains on effective engagements that deliver value. You can start with simple metrics around the regular use of the product and build toward achievements against specific business outcome benchmarks.
Share Customer Information
When you gather customer data, be sure to share it across the enterprise. Every interaction with a customer generates data and offers an opportunity to provide value. By making this information easily available to every person who interacts with the customer, you ensure continuity of service and increase the likelihood of a positive customer experience at every stage of the journey.
Removing software and performance barriers between internal teams encourages cross-functional problem solving and makes sure the customer is surrounded by informed service at every turn.
An enduring customer relationship depends on maintaining relevance to the customer’s evolving journey. Messaging around the use of product features, the introduction of new ones, upgrading customer licenses, and expanding customer access should all be tied directly to the customer’s unique business challenges. By drawing on insights from customer data, you can personalize your engagements to the customer’s current situation, making them feel valued and cared for.
Respond Rapidly to Customer Behavior
By comprehensively monitoring product use and engagement, you can track the customer experience over time. It is crucial that you respond to change rapidly, as impatient, frustrated customers are more likely to churn.
It’s important to take a proactive approach here. You know the customer, their needs, and their goals. So if you notice, say, they aren’t using a feature that will help them achieve their goals, reach out and provide some education. Or if you see the customer has maxed out on their license allocation, you can offer expansion opportunities before they ask.
Committing to Customer Lifetime Value
All of these customer lifetime value strategies depend on accurately monitoring the customer experience over time and engaging regularly and intelligently. To achieve that, it helps to use a comprehensive customer success platform. Such a platform captures and analyzes customer data, making it easy for all team members to access this information and turn that data into targeted actions. You can constantly monitor customer health scores, set up automated alerts, and create standardized processes so the right team member is notified of changes in customer behavior and has a clear directive on how to respond. This allows you to always keep a finger on the pulse of your customer relationships.
Ultimately, your growth is pinned to that of your customers. Knowing how to calculate customer lifetime value reveals the potential sustainable revenue that occurs after the sales event. Making the most of this potential means staying connected and relevant to your customers and continually working to earn their loyalty.