How to Measure Customer Lifetime Value with CRM

Understanding the long-term worth of your customers is essential for sustained growth – you can’t only focus on the here and now. After all, it’s not only about short-term gratification.

Customer Lifetime Value (CLV) is the key metric for achieving this, as it represents the total revenue a business can expect from a customer throughout the duration of the relationship. By using a Customer Relationship Management (CRM) system, businesses are able to gather valuable data to measure, analyse and ultimately improve CLV – that’s the ultimate objective, after all.

 

How Is CLV Calculated? 

 

CLV is calculated using a simple formula – average purchase value multiplied by purchase frequency and average customer lifespan.

Now, a CRM system allows businesses to track these variables by consolidating customer data like purchase history, communication records and behavioural patterns into one central platform. This enables businesses to make accurate projections of how much a customer is likely to spend over time.

Some of the best CRM providers include:

1. Zoho
2. Pipedrive
3. Monday.com
4. Freshsales
5. Capsule

 

Measuring CLV with a CRM System 

 

The first step to measuring CLV with a CRM system is tracking purchase history. CRMs capture detailed information about every transaction a customer makes, allowing businesses to identify both average purchase value and purchase frequency.

For example, if a customer spends £50 per purchase and makes four purchases each year, their annual value amounts to £200. This data is stored and organised within the CRM so it’s easy to access and analyse.

Another key factor in calculating CLV is understanding customer retention. CRMs monitor how long customers remain active, which helps determine the average customer lifespan.

For instance, if the data reveals that a customer typically stays with the business for three years, it becomes possible to project their total value. Using the previous example, where the annual customer value is £200, multiplying this by three years gives a CLV of £600.

 

 

Using CRMs and CLV to Analyse Customers

 

By grouping customers according to factors such as spending behaviour or demographics, businesses can identify which segments generate the most revenue. For instance, high-value customers who make frequent, large purchases can be identified and prioritised for retention strategies. Understanding which segments contribute most to revenue gives businesses the ability to focus resources more effectively.

To calculate CLV using a CRM, the process begins with collecting transaction data. This information includes how much each customer spends per purchase, how often they buy and how long they’ve remained active.

Average purchase value is calculated by dividing the total revenue generated by a customer segment by the number of purchases made. Purchase frequency can be determined by examining how often customers return to buy over a specific period, like a month or a year.

Finally, the average customer lifespan can be estimated by analysing how long customers tend to maintain a relationship with the business. Multiplying these three figures together provides the Customer Lifetime Value.

 

Using CLV Analysis to Develop Strategies for Improvement

 

Once CLV is calculated, businesses can use CRM insights to develop strategies to improve it. For example, personalised communication is a proven way to increase retention and boost spending at the same time.

CRMs allow businesses to send targeted offers or messages tailored to customer behaviours and preferences. If a customer purchases garden tools frequently, personalised promotions for related products can encourage further spending. Also, identifying customers at risk of leaving and re-engaging them with loyalty programmes or incentives can extend their lifespan with the business.

CRMs also make it easier to identify opportunities for cross-selling and upselling. By tracking purchase history and customer preferences, businesses can recommend complementary products or premium upgrades that are specific rather than taking shots in the dark.

This increases the value of each purchase, ultimately improving the overall CLV. For instance, a customer who buys a basic service package could be offered an upgrade to a premium option with additional benefits.

Ultimately, a CRM system can be a powerful tool for measuring and improving Customer Lifetime Value. By tracking purchase history, analysing customer retention and segmenting customers, businesses can accurately calculate CLV and make data-driven decisions to enhance it.

The insights provided by a CRM help businesses build stronger, longer-lasting relationships with their customers, leading to increased revenue and sustainable growth.