Businessman writing glowing correct sign or tick mark for quality control assurance ISO standard and project approval concept. If you lead a business, you spend a good deal of time considering how to grow revenue and profitability. Even mature businesses can miss just how much growth they can attract from their current customer base.
Blog Post

Customer Lifetime Value: How To Harness Growth from Current Customers

  • Date Posted: April 9, 2024

If you lead a business, you spend a good deal of time considering how to grow revenue and profitability. Even mature businesses can miss just how much growth they can attract from their current customer base.

Businesses are 14 times more likely to sell a new product or service to an existing customer than a new one, according to the Wharton School at the University of Pennsylvania.   Translation: Sales made to current customers are the least expensive growth to acquire and are therefore more profitable.

In fact, according to Wharton, it costs six to seven times less to earn more business from current customers than to attract new ones. Repeat business, it says, “can improve the profitability of 25% or more.”

Earning more from current customers saves on acquisition costs, but it also increases revenue, sometimes significantly, especially when businesses focus on Customer Lifetime Value (CLV).

What Is Customer Lifetime Value?

The core element is ‘lifetime’ – meaning repeat – patronage over decades.

For example, if the average business spends $8,000 a year on paper and operates for 20 years until the owner retires, the lifetime value of that customer to its paper supplier is $160,000. (We’ll call this “the traditional customer.”)

This same equation applies to all CLVs:

Customer Lifetime Value = Customer Value x Average Customer Lifespan

Knowing CLV is nice, but how does it help with growth and profitability?

Digging into CLV data can bear a lot of fruit. Once each customer’s CLV is known and tracked, owners and managers can assess:

Is the average CLV drastically different than your median CLV? Averages can hide useful insights because an average CLV is the total CLV of all customers divided by the total number of customers. Whereas, the median is the middle point of CLVs. If the median is higher than the average CLV, take a deeper look at the customers who are pulling the median higher.

Look-alike customers then become an opportunity. Researching customers who pull the median CLV higher can reveal tactics to increase other customers’ CLVs. It is an oversimplified example, but consider the paper company again; only now it also offers filing and storage solutions, which brings in another $8,500 per customer per year. Customers who utilize the filing service and who buy the average amount of paper provide more than double the CLV. (We’ll call this “the expansion customer.”)

CLV = $16,500 x 20 years = $330,000

That’s nice on paper, but how would the paper company turn traditional customers into expansion customers?

If you’re that paper supplier, you know that some of your customers need filing and storage solutions but don’t obtain those services from you. They may handle it themselves onsite, may use a different provider, or may have just reached a size where they can outsource.

A new rewards program—or favorable pricing for existing customers—can open an opportunity to gain new business for traditional customers. Rewards or loyalty programs also give sales personnel a reason to reach out and start a conversation.

The Wharton School also recommends businesses assess ways to drive CLV higher:

Increase Sales: 

Opportunities to increase how much customers buy when they buy can differ by business and industry. Can you sell ancillary products or services that complement what they buy from you?

Increase Purchase Frequency:

Opportunities to earn business more often from customers can differ by business and industry.

“For a coffee shop, this might look like opening more locations in a high-sales area, or extending the open-close hours for each location,” the Wharton School says. “For an e-commerce brand, it might result from sending more frequent email communications or releasing more offer codes on social media.”

Increase Customer Lifespan:

Because the cost of acquiring new customers is so much higher than adding business with current ones, owners or managers can also bring that value back to customers through loyalty programs based on tenure.