Increasing your customer’s lifetime value is critical to your business’s success.
While there are plenty of ways to grow your client base (make booking as easy as possible with online scheduling software, market your brand on Instagram, for example), any service-based business relies on relationships to keep customers coming back.
It’s your job as a service provider to make the lifespan of a client relationship as long as possible—maximizing how many times you can get paid for appointments. This client lifespan is called the lifetime value of a customer, sometimes called CLV or LTV.
What is the lifetime value of a customer or client?
Customer lifetime value is pretty much exactly what it sounds like: It’s how much the customer is worth to you in terms of net profit during their entire time as your client.
A solid lifetime value depends on building lasting relationships with clients so they keep coming back. And since it takes so much time and mental energy to build relationships with your clients, it’s critical that you maximize the lifetime value of each client.
How to calculate customer lifetime value
Part of the reason so many small business owners feel stressed about calculating customer lifetime value is that it seems so complicated. Here’s one of the simplest ways of calculating customer lifetime value:
1. Pull data for the last 365 days.
You’re going to want to use the same dates for all of your variables (as we’ll mention below)!
2. Calculate your average order value (AOV) .
Total revenue divided by number of orders equals your average order value.
3. Calculate purchase frequency.
This is the number of orders divided by unique customers.
4. Calculate customer value (CV).
Average order value (from step 2) multiplied by purchase frequency (from step 3) equals your customer value.
5. Calculate the customer’s average lifespan.
This is the hardest one because it’s less of a trackable number. Here’s how smile.io explains it in their great article on calculating lifetime value:
“A customer’s average lifespan or (t) is the average time a customer remains active before they drop off and go ‘dormant’. Meaning that if the time between a customer’s first and last purchase is 365 days, then (t) would be equal to 365.”
6. Use these numbers to calculate customer lifetime value.
Here’s the final formula:
Customer value multiplied by customer’s average lifespan equals customer lifetime value.
That wasn’t so bad, right?
You can dive more deeply into the formula to adjust for variables such as different customer segments, margin, etc. Again, smile.io does a great job of explaining those additional lifetime value calculations. You can also read Hubspot’s article on how to calculate customer lifetime value for even more details.
But, in the interest of keeping things simple, let’s talk about what you really want to know: how to increase your customer lifetime value.
How can you increase the lifetime value of a client?
It almost seems as if the lifetime value of a client is up to the client, rather than you, right? Only they can determine how much money they spend with you and how much of a relationship they’ll build.
But there are some simple steps you can take to influence the length of your clients’ relationship with you, and get that lifetime value climbing. With a little strategy, you’ll see your lifetime values increase over time.
1. Create a sustainable sales sequence.
A sales sequence is when you start by selling your client something of lower value, and then work your way up to a higher priced service.
For example, let’s say you’re a nail tech. You could start by offering your client an express pedicure that costs $40. Then, recommend a slightly higher priced service the next time they book an appointment. Maybe it’s a spa pedicure for $55. After that, offer upgrades for an even higher priced service, like massages or special treatments.
This system works because people feel more comfortable spending smaller amounts of money with you when they first become a client, because they aren’t familiar with you yet. The lower price packs a lower risk when clients are just getting to know you.
But as you build trust with them, clients begin to see that you do good work and they want to continue doing business with you. With that trust, they become more willing to buy your higher priced services and packages.
When you’re setting up your sales sequence, think in terms of what would make sense for a client to upgrade. Maybe sessions last longer, or promise quicker results. Whatever the case may be, think about the sequence from the customers’ point of view and create a series of upgrades that naturally build on each other.
2. Create a loyalty program.
If a client doesn’t return to you after they book with you initially, then their lifetime value to your business is limited to the profit you made from your first and only transaction with them. That’s a pretty sad lifetime value.
So to increase that lifetime value, you’ll need to entice your clients to come back—and you can make serious gains by using a loyalty program.
Perhaps you offer a discount for a second visit, or provide punch cards for subsequent visits. Maybe you give repeat clients a free upgrade. You could also consider package deals and bundles, selling multiple sessions all at once at a discounted rate.
Make sure to market this strategy as a loyalty program, making your clients feel as valued as possible. Remember, you’re not just increasing your customers’ lifetime value, you’re thanking them for being such devoted customers. Win-win.
3. Focus on building personal relationships with clients.
All the strategic marketing in the world won’t pay off without the personal element customers expect from service-based business. Establishing a relationship—even a friendship—with your clients is key to building the trust it takes to keep people coming back.
Whenever you’re providing a service, take time to get to know your clients on a personal level. Ask them questions that go beyond the service: How was their day? What’s going on in their lives? Are they traveling anywhere fun in the next few months?
As you get to know your clients, you can go even deeper. What are their needs that you can fill? How can you make their lives easier? If you’re a fitness provider, remember that exercise and health can be complicated for people, and you’ll need to be sensitive. Same goes with estheticians and stylists: Clients are looking to you to help them create the image of themselves they have in mind, and that takes trust!
Meeting your clients’ needs with your services and building solid relationships will increase the lifetime value of your clients authentically—giving you loyal, trusting customers who keep coming back.