Average Customer Lifetime Value by Industry (ACLV)
Acquiring new customers can be up to 25 times more expensive than retaining old ones. Customer retention is the key to a stable source of income for your business, as existing customers’ repeat purchases keep your business running.
So, how can you see if your customers are engaging with your business and making these repeat purchases? By measuring your customer lifetime value (CLV).
Understanding and improving your company’s CLV can increase your company’s profits, help you plan your budget and analyze customer satisfaction.
To learn more about your CLVand how you can use it to increase your recurring revenue, keep reading. ng.
Why is calculating the average customer lifetime value important?
Before asking this question, you should know the definition of the Average Customer Lifetime Value (ACLV). The ACLV of a business is the profit that it can expect from a regular client for the duration of that customer’s relationship with the brand. If, for instance, a company’s ACLV is $500, that company can expect to get an income of $500 from a regular customer.
There are several reasons why this metric is important for businesses. Below are some of them.
A high CLV means that your customers are making repeat purchases. In other words, you’re profiting by renewing subscriptions and upselling or cross-selling to your existing customers.
Optimizing for CLV is a reliable and profitable strategy since acquiring new customers is more expensive than selling to existing ones. This is because your sales teams have to make up for the CAC if you’re trying to profit off of new customers. Thus, if you want to have a steady flow of revenue, your sole focus shouldn’t be on customer acquisition.
While customer engagement campaigns also require resources, keeping existing customers is still cheaper and easier. These customers already have a certain amount of trust in your brand and are relatively easier to sell to. So, if you divide your focus into acquiring new customers and catering to the needs of retained ones, you can grow your customer base more easily.
Lastly, knowing about customer segments with high CLVs can also help you acquire customers that are more likely to stay loyal and spend on your products for longer.
Businesses with high average CLVs can rely on their customers’ repeat orders. Thanks to this consistent flow of revenue, companies can predict their future income, plan and allocate resources in advance, and keep up with their regular payments.
Also, since they profit more and thus have more resources, these companies can spend more on acquiring customers that fit their ideal customer profile. They can also grow and expand their company more easily with these resources.
It Signals Customer Satisfaction
If your customers are interested in your products and engaged with your brand, they’ll keep purchasing from you. A high CLV means that your business is successful in terms of customer engagement and customer marketing since these two strategies lead to more upsells, cross-sells and retention.
All these reasons explain why it’s important to measure and increase your ACLV. However, to improve your ACLV , you’ll first need a benchmark and see how your company has been performing.
Average customer lifetime value by industry
Since the price of goods or services in every industry is different, the average CLV will vary from industry to industry. Below is a list of different types of service businesses and their customer lifetime revenue.
The customer lifetime revenue (CLR) can be thought of as a simpler version of the CLV. While CLV calculations can take into account gross margin or cost factors, the CLR looks at the total income from a regular customer and not just the profit.
5 strategies to increase your average customer lifetime value
The key to increasing your ACLV is to increase customer retention and engagement. After all, you’ll profit from existing customers more if you retain them and if they want to continue using your products. Below are five strategies that will help you increase your retention, engagement, and thus your ACLV.
Focus on Customer Service
When people have bad experiences with your products, it’s just a matter of time before they stop buying from you (and then tell other people about their experience, so that they also stop buying.) In fact, 62% of customers say that they share any negative experiences with their friends and colleagues.
Luckily, there’s still hope for retaining and engaging customers after an unsatisfactory experience.
If you’re able to solve customers’ problems with an agile and equipped customer service team, you’ll not only retain customers, but you’ll also profit more from them. Today, customers value good service above all, and even if you’ve failed to satisfy them with a feature, solving their problems quickly can win back their hearts. When they’ve been provided with such good service, customers are more likely to cut your business some slack if you ever do drop the ball and even pay more.
So, how can you improve your customer service? You can start by offering 24/7 support, because SaaS customers expect fast replies, and since your company’s customer base is likely diverse, not every user is in the same time zone as you. You should also have omnichannel support because your customers use various channels and devices to interact with your brand.
When their experience with your customer service team is satisfactory, users will trust your company and its products more. This will lead customers to stay with your brand and make repeat purchases, increasing your ACLV.
Offer Personalized Experiences
75% of customers agree that they’re more likely to buy from a brand that offers personalized digital experiences. Companies have access to a big pool of buyer data, and they’re expected to use this data to improve and personalize each customer’s experience.
But why is personalization so sought-after? First of all, it increases product adoption. by answering their individual needs. For instance, if you personalize the onboarding process of a customer so that they see the features that can help their business’s needs, they’re more likely to keep using your product. And when users see the value of your products via adoption, they keep paying for it and its many features.
Personalization also results in better marketing campaigns: when you send in-app messages and emails that are designed for individual customers, you’re more likely to get positive responses. This also makes your customers feel valued and seen, which is the ultimate goal of customer marketing.
So, by personalizing customers’ experiences, you can create more upselling and cross-selling opportunities, increase retention and finally increase your ACLV.
Listen to Customers’ Feedback
Personalization and good customer service are tried-and-tested strategies, but the best way of satisfying customers is by collecting and incorporating feedback. Understanding the problem with your products and services is much easier when you go to your customers and ask for their opinions. Also, you can use personalization and customer service to solve customers’ pain points only once you’ve understood their complaints.
There are various ways in which you can collect customer feedback. The first one of these is sending out a CSAT survey, where customers state their level of satisfaction on a visual or numeric scale. While CSAT surveys are effective, they’re more suitable for detailed questions: asking about a customer’s overall experience with your products in a CSAT survey won’t be very productive. However, asking them about their recent experience with your customer service team will give you focused and useful answers.
To get a general understanding of customer satisfaction, you can use NPS surveys. Based on the answers to questions like “On a scale of 1 to 10, how likely are you to recommend us to a friend or colleague?”, these surveys help you categorize your customers into three groups: promoters, passives and detractors.
By increasing the number of promoters and decreasing the number of detractors, you can ensure customer satisfaction. Contacting survey respondents with individual emails, and asking about ways you can improve their experiences is one way of improving your NPS score. Another is by adding passive customers to your loyalty programs and rewarding them for their continued interest.
You can also add follow-up questions to NPS surveys and ask customers the reason behind their scores, and then act based on their responses. Tools like HockeyStack come with free survey tools, so you can start asking your customers their opinions immediately. These surveys can be targeted at specific customer segments and show you the people that are more likely to respond. They also come with ready-to-use templates, so that you don’t have to spend time designing and formatting.
In short, collecting customer feedback and improving your products and services based on it will increase customer satisfaction, retain more users and again, increase your ACLV.
Publish Engaging Content
Content marketing, email marketing, and many other inbound marketing strategies are effective only when they’re interesting and informative. There’s a stark difference between promotional and educational content and only publishing the first type becomes overbearing to prospects. s. That said, your content can (and should) highlight the features and uses of your products, but it should do so to educate customers, not to sell.
For instance, if you’re a customer onboarding platform, you can send out emails telling users about the number of customers that have used the onboarding tutorial and moved on to adopt your product. You can also publish articles about the importance of customer onboarding programs and how they increase engagement.
This strategy shows customers logical reasons to pay for your services. Instead of forcing them to buy, it tells them how your products can address their pain points and waits for them to make the decision themselves. And when customers are given time to think and logical arguments to decide, they’re more likely to stick around with your business.
Not only that, but your content can keep selling to customers even after they’ve subscribed. You can talk about your add-ons and upgraded versions in said content as well. Later, by using an analytics tool like HockeyStack, you can see how this content impacted your CLV by using dashboards and graphs.
Recognize and Reward Existing Customers
Collecting customer feedback isn’t the only way of making customers feel valued. Running loyalty programs is also another great way of showing customers your appreciation. These programs may include discounts and rewards, or they may be in the form of points that are collected after each purchase. Programs like these also serve as an incentive for existing customers to make new purchases.
You can also reward your most engaged customers with other specialized benefits. This may look like giving early access to certain features, the ability to pre-order new products, and even manually crafted thank you notes.
Appreciating customers in this way helps you build sustainable, long-term relationships with them. When customers have such relationships with your brand, they are more tolerant of your small mistakes, less likely to switch to competitors, and more likely to make purchases.
Calculating traditional CLV
You may have seen many different CLV calculations on the internet, but here’s the one that’s used the most often (and is relatively easier to use.)
CLV = Average Purchase Value x Average Purchase Frequency x Average Customer Lifespan
You can find your average purchase value by dividing your revenue by the total number of sales. The average purchase frequency can be calculated by dividing the number of total purchases by the number of unique customers, and the average customer lifespan can be found by taking the average of 1/Churn Rate.
Let’s illustrate this calculation with an example. Your SaaS company has a total revenue of $100,000 after 10 months. During this period, you had 100 active customers, and a total of 1000 purchases were made. Your churn rate in this period was 0.20.
In this case, your average purchase value is $100,000 / 1000 = $100. Your average purchase frequency is 1000 / 100 = 10. Your average customer lifespan is 1 / 0.20 = 5 months. So, your CLV is equal to $100 x 10 x 5 = $5,000.
You can look at the profitability of each customer (rather than the revenue brought by each) by adding another factor to the equation above, which is your gross margin.
That said, doing all these calculations for your customers manually can be time-consuming. An analytics tool like HockeyStack can be integrated into your business in less than five minutes, and then show you the CLV of your customer segments and individual users (and even their behaviors, MRRs, and Churn Rates) on the same dashboard.
How can CLV calculations be used?
You can adapt the CLV calculation to predict future customer behavior, and analyze historic data and business strategies.
1. Predictive CLV
Predictive CLV is calculated by using statistical regression and machine learning, and the resulting number helps businesses identify valuable customer segments. When you know about these segments, you can tailor your marketing campaigns to their needs and improve your customer acquisition strategy.
Predictive CLV can also be used while budgeting. When you’re able to foresee the average revenue that your customers will bring, you’re able to allocate money for acquisition and marketing beforehand.
2. Historical CLV
Historical CLV looks at the past behavior of customers and their spending. The historical calculation is a better choice when you’re trying to analyze your business’s performance in the previous periods. When used as a KPI, historical CLV can tell you which strategies were effective in increasing upselling and cross-selling opportunities, and which campaigns had a positive impact on customer retention.
3. CLV:CAC Ratio
The ratio of your customer lifetime value to your customer acquisition cost shows investors the health of your business. A ratio between 2 to 3 is acceptable for SaaS businesses. If your ratio is lower than 2, you’re spending too much on acquiring new customers, and such a business doesn’t seem stable to investors. If your ratio is higher than 3, your company isn’t using its resources to expand and diversify.
If you want to keep providing customers with the services they need, you need to profit. After all, adding new features, hiring a fully-equipped customer service team and building products require resources. The CLV calculation shows you whether your marketing and sales strategies are bringing you the revenue you need.
Besides this financial aspect, the CLV calculation is also an important indicator of customer engagement and satisfaction. Such a versatile metric should be used by any SaaS business looking for growth.
The average customer lifetime value measures the average profit a business can expect from a customer over the course of its relationship with the brand.
A simple average lifetime value calculation can be done by multiplying your average purchase value, average purchase frequency, and average customer lifespan.