When it comes to the customer lifetime value (CLV) of a company’s customers, there are three key metrics to keep in mind: acquisition, retention, and referrals. The goal is to maximize CLV over time by focusing on all three of these areas. Here is how you can create a framework to do so.
Attach a lifetime value to each customer
Once you’ve calculated the lifetime value for each customer, it’s time to use this information. The first step is to attach a lifetime value to each customer. This will help you figure out what kind of investments in customer acquisition are worth making based on expected returns. The second step is to set goals based on those returns—and make sure they align with your overall business goal.
Understand the source of your customers
You should be tracking the channels that deliver your customers. This is important because you need to understand which channels are more effective in driving customers and which ones are more expensive. You’ll also want to know whether or not the channels you use are more profitable than others so that you can allocate your resources accordingly.
Identify which customers are contributing to your revenue
The first step in setting up a customer lifetime value model is determining which customers are contributing to the company’s revenue. The best way to do this is by looking at the source of revenue, such as whether it came from new sign-ups or existing customers that renewed their contracts. Once you’ve identified these sources, you can start thinking about how you want to segment them further into groups so that you can analyze each group separately without getting distracted by other factors that may be influencing these numbers.
Identify churning customers
Now that you know why churning customers are a drag on your business, it’s time to identify them.Your churning customers can be identified by their behavior. Are they not engaging with you like they used to? Do they complain about the same thing over and over again without resolving the problem? Do they stop using your product or service altogether after a certain number of months or years? These are all signs that someone is likely churning.
Your churning customers can also be identified by their value. Are these users willing to pay for your product or service but don’t have the means to do so (e.g., low credit score)? Have you reached out and tried offering them another payment option multiple times but haven’t heard back from them yet? This could indicate that they’re not interested in paying anymore due to financial constraints or other reasons outside of their control. Does this user spend less than an average customer? If so, then it might mean that he or she isn’t seeing enough value in your business right now which makes sense considering how much money goes into running a startup.
Use tools to track CLV in real-time
Many platforms allow you to track CLV in real-time, or at least have access to historical data.For example, if you are using Google Analytics as your main analytics tool, there is a report called “Behavior Flow” which allows you to see how users flow through different pages of the site while they are interacting with it. This is an effective way of tracking CLV because it tells you exactly where users drop off and what the reasons were for them leaving the website before reaching a conversion goal (e.g., making a purchase).
This framework should have given you some ideas on how to set CLV goals. While know it can be hard to choose the right goal, by focusing on the value of your customers and working backward from there, anyone can come up with a good estimate of their CLV.