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How to Calculate Customer Lifetime Value at Your Small Business
small business customer loyalty customer loyalty

How to Calculate Customer Lifetime Value at Your Small Business

Calculate clv

Using Belly to Improve and Increase Customer Purchases

Understanding the CLV (customer lifetime value) is such a priority that big box chains devote entire teams to analysis and forecasting. Some of the largest technology companies in the world have attempted to use customer information, slicing and dicing to produce pages of analytics that would make anyone’s eyes glaze over. The average merchant may not have access to these types of technologies as well as the time, but there are really some simply guidelines that can be used to drill down to your customer lifetime value information.

Why Is CLV So Important?

In the retail world, it costs more to get a new customer than to retain an existing one. Higher costs mean less profit, so it only makes sense to do everything that you can to keep existing customers. The longer you retain your current customers, the higher the ROI for all of your marketing and store costs. An Aberdeen Research report on CLV shows that the data is highly valuable for projection of current and future costs as well as the type of marketing that will be needed for increased profits. Once you have configured the customer lifetime value, you can use the information for predictive analysis to target those most likely to buy. 

You Need to Have Customer Information

Before you begin to make use of CLV, you’ll need to have access to the details of your customer purchases. You can tap into your POS system to understand what your customers are buying. With Belly’s small business loyalty program, you can use the data around customer visit history to give a clearer picture of a customer’s buying and shopping habits at your business.

The Simplicity of the Formula

In its purest method, the formula for CLV is:

Annual profit contributed per customer

TIMES

Average number of years that they have remained a steady customer

MINUS

Initial cost involved in customer acquisition

To expand on this, let’s use an example that clarifies what this actually means:

  • The profit that is generated by a customer, per year is $1,000
  • The number of years that they have continued to be a customer has been 5 years
  • The price tag (or cost) that is associated with acquiring the customer is $2,000

The CLV would be:

$1,000 x 5 yrs. = $5,000

Less $2,000 = $3,000

Finding Out What the Detailed Costs Are:

Formulas can be wonderful, but the question remains, how do you find out what the profits are per customer as well as the costs involved for customer acquisition?  This is just a bit more complex and will vary from merchant to merchant. A loyalty program, such as Belly, provides the data (See Belly's Web Command Center) to help you determine average number of visits per customer. Then use your average basket size to multiply by number of customer visits to get revenue.

Making use of the critical data found in the Belly loyalty program you can establish some of the baselines as shown in this example:

  • The annual average revenue per customer is $2,000
  • Using the store product costs divided by the number of customers, configure the average product costs that are associated with the typical customer purchases over a period of a year. Let’s use the example of $500.
  • The merchant has additional overhead costs of $100 per customer in providing customer service.
  • Your average loyalty retention rate is around 80%
  • The average cost associated with acquiring a new customer is $1,000 (rule-of-thumb)

To reduce this down so that it is more efficient, the first area to address is the calculation of the average profit per customer. It is the deduction of the products and service costs from the annual revenue of the customer: $2,000 – $500 – $100 = $1,400.

If you only have one year of data for a customer, you can expand that as a 5 year average. In this example the final resulting figures would be:

CLV = $1,400 (profit) X 5 (years) – $1,000 (acquisition) = $6,000

Going Beyond the Purchase

Access to individual purchases per customer empowers the merchant to drill down into the buying behavior of the customer. This includes the all-important customer retention and offers the option of cross-sell/up-sell potentials for marketing. Each level will increase the CLV of a customer, but it actually goes beyond that point. Customer defection can be detrimental to your business, and there are only a few ways to recognize a lost opportunity.  Using the Belly loyalty program you can view the customer buying behavior and catch a customer when they stop shopping. The key element is to catch them before they have made a commitment to a competitor and offer an enticing reason to return. The data analytics that you have at your fingertips with the Belly loyalty program will allow you to bring the customer back and continue to be a loyal customer, thereby increasing their CLV.

Predictive Buying Can Increase the CLV

One of the largest technology companies in the country has created a predictive program that they are selling back to the big box chains. Predictive buying allows a merchant to know what a customer will buy as well as what they may not be purchasing from your store. A typical example of this might be the purchase of baby diapers but not the purchase of other baby products. By keeping track of purchases, you can craft intelligent marketing campaigns to increase the basket size with other baby product discounts. Predictive buying can also apply in the encouragement of higher priced items by offering a coupon or discount as a loyalty member through the Belly platform. Each additional dollar spent increases the CLV.

Making use of the data that is available with the Belly’s suite of loyalty marketing tools is part of the business intelligence (BI) method to retain and entice existing customers and attract new customers. Appealing to them on a personal level will help in maintaining their loyalty to you as a merchant and increase the customer lifetime value.

Ready to see how Belly can work for your business? Request a demo.