Every customer brings value to your business. The question is: how much value? What turns your customers into loyal fans?
What is Customer Lifetime Value?
Customer Lifetime Value (CLV, LTV, CLTV) is a marketing metric that represents the total amount spent by a single customer on your products or services over their lifespan. CLV is all about customer retention and satisfaction.
So, one of the ways to effectively grow your business is to retain your existing customers and increase their lifetime value. The longer your satisfied customer stays with you, the more profit he/she brings to your business.
Why is CLV Important To Your Business Growth?
But the surprising thing is that about 50% of companies choose to put greater focus on customer acquisition vs. 18% that focus on retention. By knowing the above statistics, we can see that Customer Lifetime Value is an important metric that is not explored as much as it should be.
However, that’s good news for you! By focusing on it, you have an advantage and can stay ahead of some of the competition. So, let’s dive into how you can calculate Customer Lifetime Value and then increase it.
How To Calculate The CLV of Your Business?
To measure your Customer Lifetime Value, we will need to calculate a few numbers.
- Average order value: divide your company’s total revenue over a period of time by the total orders your customers made during that time frame.
- Average purchase frequency rate: divide the total number of purchases by the number of unique customers who made purchases during that time period.
- Average customer lifespan: average the number of years a customer continues purchasing from your company.
- Customer lifetime value: multiply the average order value by the average purchase frequency and then by the average customer lifespan. This helps you identify how much revenue you can expect to generate from a customer over the life of their relationship with your company.
The average sales in a Sports e-shop are $120 and. On average, a customer shops two times a year for two years. The customer lifetime value is calculated as:
AOV($120) x purchase frequency(2) x lifespan (2) = $480
Calculating the lifetime value can assist you in estimating future revenue and the number of customers you need to obtain to achieve profit.
For example, when you know your average CLV, it’s easy to identify your maximum price for customer acquisition. Simply multiply CLV by your profit margin. Let’s use the industry average of 15% as an example:
CLV($480) x profit margin(15%) = $72
This means that if you spend more than $72 to acquire a customer you are likely to operate at a loss.
How To Increase Your Customer Lifetime Value?
Focusing on Customer Satisfaction and Customer Retention is the way to increase lifetime value of your customers. Here are 5 effective ways how this can be achieved and maintained.
- Offer referral program
Referral programs are a great way to increase customer lifetime value. Referred customers have 16% higher lifetime value and 18% less churn. Furthermore, 81% of consumers trust recommendations from people they know, and 55% of people share their new purchases on social networks.
This means that by offering a referral program, you improve your CLV and get the additional benefit of exposure to new possible customers, which then can be turned into loyal customers.
- Provide targeted, personalized campaigns
56% of digital marketers agree that email marketing is the most effective digital marketing tactic for customer retention. However, many businesses fail to deliver meaningful content. Instead of providing valuable content, they limit themselves with automated campaigns without offering any real value.
Sending targeted and personalized campaigns lets you focus on specific customers and help them be engaged with content specifically tailored to them. Check AI-suggested personalization for specific groups of your customers with Verfacto.
- Put them first—hear your customers
Whether the majority of your customers are happy or not, you’ll notice by your business performance. But to measure their satisfaction more accurately, always collect the necessary data. In this case, a short survey works well. In there, you can include:
- On a scale from 1 to 10, whether the customer would recommend your products to someone else.
- Where could things be improved (product description, presentation, delivery costs, etc.)
- Optional short comment for any additional feedback.
Giving your customers a way to share their feedback makes them an important part of your business growth. By listening to customers’ feedback and improving where you can, they will appreciate the effort and will likely continue to stay loyal to your brand.
- Optimize your customer service
Better customer service leads to a better customer experience which, as a result, increases customer retention and improves customer lifetime value. Make sure your business is active on multiple social media channels, as 66% of customers use at least 3 different communication channels to contact support.
Then, look into which channels your clients use the most and allocate resources accordingly. Clients usually expect a fast response to their questions, requests, and complaints, so ideally, you should provide 24/7 live chat support.
However, if you don’t have the means to do that, respond to clients as fast as possible, as 84% of consumers expect a response within 24 hours if they post complaints on social media.
- Reward your most loyal customers
By calculating your lifetime value of every customer, you will see which customers are the most loyal to you (see it in one click with Verfacto). This is a perfect time to foster your relationships with these customers by giving them special offers. These offers can include cheaper (or free) shipping, early access to new items and guaranteed order availability for limited and exclusive stock, and more.
Rewarding your most loyal customers will undoubtedly increase their satisfaction and retention long term.