Customer Service Glossary
Table of Contents

    What Is Customer Lifetime Value?

    By definition, customer lifetime value (CLV) is a calculation that indicates how much money a shopper or customer segment is likely to spend throughout the entirety of the customer-retailer relationship. Also known as the lifetime value of a customer, CLV methodology drives crucial business decisions, including how much time and money brands should allocate to new customer acquisition and existing customer retention strategies. 

    Put simply, customer lifetime value helps companies estimate the profit margin that they can expect to earn from a single consumer or market segment. Customer lifetime value is especially important for companies with a subscription business model, as they analyze the factors that influence customer retention and acquisition.

    Management teams can calculate customer lifetime value by using the following formula:

    Customer Lifetime Value = Average Purchase Value x Average Purchase Frequency x Average Length of Relationship. 

    For example, if a regular customer has ordered a cup of coffee from a cafe each morning since the shop opened four years ago, the shop can use the formula to calculate their CLV, as follows.

    $3.50 per cup of coffee x 365 cups of coffee per year x 4 years = $5,110

    Companies can use the information for countless decision-making processes, including:

    • Setting marketing budgets
    • Determining key performance indicators (KPIs) for targeted advertising, online retail sales, and customer service
    • Developing budgets, customer acquisition spending, and investments
    • Setting prices for subscription services
    • Deciding which products or services to bring to market

    In addition, brands may learn where they can upgrade their product and service offerings, marketing efforts, and customer acquisition strategies to increase their revenue due to calculating CLV. Finally, a company can use CLV as a comparison tool for benchmarking growth, performance, and customer acquisition costs from year to year.

    Why Is Customer Lifetime Value Important for Customer Service Departments?

    Customer lifetime value information may seem like a metric better suited for business analysts, product developers, and marketing teams. Nevertheless, customer service departments play a vital role in maintaining and improving CLV. 

    With that in mind, customer service agents can impact customer lifetime value in several ways, including: 

    1. Enhanced Customer Experience

    Nearly 90% of customers are willing to pay for a better customer experience. Further, businesses that invest in improving customer experience can double their revenue within three years. 

    As such, it pays to enhance customer experience. Customer service agents are on the frontlines of customer experience, representing a business’s values, beliefs, and attitudes in a primarily client-facing role. When customer support representatives provide exemplary service, they directly impact the customer experience and, in turn, the lifetime value of a customer. 

    2. Improved Customer Loyalty

    Businesses can increase customer lifetime value by adding utility to the customer-retailer relationship. The added value may come in countless forms, including new products, services, incentives, or rewards programs. 

    However, one of the most effective ways to provide value to customers is by implementing new communicational channels, making it easier for customers to connect with a customer support representative. 

    3. Lower Operating Costs

    Acquiring new customers costs 25 times more than retaining existing customers. Alternatively, increasing retention rates by as little as 5% can boost long-term profit by as much as 95%

    Customer service departments can help strengthen brand loyalty and nurture relationships with existing customers through customized support, real-time assistance, and personalized product recommendations. 

    How to Increase Customer Lifetime Value Through Customer Care

    Customer service departments can assist in increasing customer lifetime value in two key ways: 

    1. Optimizing Customer Service Operations

    Customer service can make or break a consumer’s perception of a brand. Customer support is also a critical deciding factor when it comes to brand loyalty. In fact, more than 90% of shoppers will abandon a brand after two to three negative interactions. 

    Customer service departments can help reduce the risk of customer churn – and, ultimately, improve CLV – by prioritizing personalized customer assistance, rapid responses, and efficient support. 

    2. Developing Convenient, Omnichannel Touchpoints

    Engaged customers tend to be loyal customers. Still, engagement depends on convenient communication touchpoints that customers can access from any type of device. 

    Incorporating omnichannel communication strategies into the customer service process guarantees a streamlined customer experience – and ensures that shoppers receive the assistance they need when they need it.

    Enhancing Customer Lifetime Value Through Customer Service 

    Businesses turn to customer lifetime value information to guide marketing, sales, and operational decisions. However, customer service departments can impact customer lifetime value by focusing on consumer engagement, simplifying the communication process, and raising customer loyalty levels.

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