What is Customer Lifetime Value ? How To Increase It In Your Business

Customers are acquired and lost throughout the life of any business; however, a quality product or service will keep customers happy and still craving more, metaphorically in a sense. This desire to be more continually brings value to the business throughout its relationship with its customers. Check out our guide on calculating the value of a customer’s lifetime; go to our information graphics below.

What is Customer Lifetime Value

customer lifetime value is the sum of money you, as an online business, receive from a client over time. It is a measure of every single order they make. It’s a great way to gauge customer satisfaction, loyalty, and brand sustainability.

Understanding the CLV aids businesses in determining strategies for attracting new customers and retaining existing ones while preserving the profit margins.

Why is Customer Lifetime Value Important?

Here are a few of the reasons knowing your CLV is crucial:

1. Growing CLV could increase revenues over time.

The longer the lifespan, the greater value a client offers during their life, and the more money businesses earn. Thus, monitoring and increasing CLV will result in higher revenues.

CLV determines the customers who contribute the highest revenues to your company. This allows you to provide your existing customers with the products or services they enjoy, making them feel more satisfied and thus spending more money with your business.

Based on HubSpot Survey, 55% of growing companies believe it’s “very important” to invest in customer service programs.

When we examine companies experiencing declining or stagnant revenue, just 29% of respondents said the investment is “very important.” Businesses with a strategy looking toward customer success with satisfaction with their customers have seen more revenues due to increased customer satisfaction.

2. It can help you identify issues to boost customer loyalty and retention.

If you evaluate CLV as a top priority for your company, you will be able to discern any troubling trends and develop actions to address them.

If, for instance, you observe that your CLV seems to be constantly low, it is possible to enhance your customer service strategy and loyalty program to meet the demands of your customers.

3. It allows you to target your ideal clients.

When you understand the lifetime value of a customer, you’ll also know the amount of money they’ll spend with your company throughout the period, whether that’s $50 or $500, or $5000. With that information, you can devise an acquisition strategy for customers which targets those who spend the most time at your company.

4. The increase in CLV could help cut customer acquisition costs.

The process of acquiring new customers can be expensive. According to an article published in The European Business Review, the average acquisition cost is five times more costly than retention.

Furthermore, a different study research carried out by Bain & Company found that an increase of 5% in retention rates can increase profits from 25 to 95 %.

These statistics show that it’s vital that your business recognizes and maintains those customers who are the best who interact with you. In doing this, you’ll enjoy higher margins of profit, a greater value of your customers’ lifetimes, and lower acquisition costs.

4 Steps for Measuring Customer Lifetime Value

Determine Your Average Order Value

Begin by calculating the price of an average sale. If you’re not keeping track of this information for a long time, look at the one or three-month time frame as a substitute for the whole year.

Calculate the Average Number of Transactions Per Period

Are customers frequenting the shop several times per week? This is typical in coffee shops or perhaps only once or twice a year, as is the case for an auto dealership. The regularity of customer visits is a significant factor in the CLV.

Measure Your Customer Retention

In the end, you’ll need to find out how long a typical customer stays loyal to your company. Certain brands, such as technology and auto brands, can create long-term loyalty. Others, such as retailers or gas stations, might have less loyal customers.

Calculate Customer Lifetime Value

Now you’ve got the inputs. You can now multiply three numbers to calculate CLV according to this formula.

Customer Lifetime Value Formula

Here’s the formula for customer lifetime value calculations

CLV = Average Transaction Size x Number of Transactions x Retention Period

Each of these inputs functions as a lever that you use to boost your CLV. However, any action your business takes could result in unintended effects that affect CLV. For instance, the price hike could boost your average size of transactions, but it may also force customers to spend less or search for alternatives with lower costs.

Boosting customer lifetime value

As the chances of selling to an existing customer are 60% – 70 %, according to the eConsultancy, and the chances for selling to a brand new customer range from 5% -20%, putting your time and resources into selling to your existing customers is essential. It’s generally much easier to sell to your existing customers than to spend money on acquiring new customers.

Make sure you invest in the customer experience.

The customer experience consists of every interaction between a consumer and the brand, such as store and contact center inquiries and purchases, use of the product, and even exposure to advertisements or social networks. Making improvements to the customer experience is a global business endeavor usually addressed through the system for managing customer experiences. This involves taking note of, listening to, and making adjustments, which improve the way customers feel about their experience and the potential to remain loyal in the long run.

Make sure that your onboarding procedure is smooth.

The customer experience starts when the potential customer first encounters your company, but sometimes businesses don’t realize that their customers require care following purchase. Therefore, it is important to ensure that the onboarding process is optimized for your customer’s needs and is as simple and straightforward as it can be with little effort on the part of customers. The top priority is customizing and communicating the additional value you can offer your customers.

Start a loyalty program.

The reward program encourages repeat business by providing discounts or other benefits as a reward. It could be an app, loyalty card, or even a points system that customers accumulate each time they purchase. Although it’s not the perfect silver solution to the retention of customers, however, a loyalty program can produce amazing results when carefully planned and executed. We’ve provided a wealth of ideas for making sure you’ve got your loyalty program running smoothly.

Reward and recognize your top customers

Once you have your customer experience management system in place, You’ll have some thoughts on which customers are most likely to have the highest CLV. Then, it is possible to build connections with these people or groups with targeted promotions and marketing that reward loyalty. This could include free speedy shipping, top-of-the-line benefits in your loyalty program, as well as access to special or pre-release items and services.

Provide omnichannel support

Your customers will have a range of choices when it comes to how they interact with you, which is why your support channels must reflect this. Research to find out what channels your customer base prefers rather than offering only the options you think they’ll like to use. Get feedback from your customers about Self-service solutions and interactions with frontline staff to ensure a positive customer experience through omnichannel support.

Use the power of social media. 

Social media has become increasingly crucial to communicating with customers and also to help customers gather details about your brand and public image. If they feel your responses on social media to an issue or query aren’t swift sufficient, comprehensive enough, or helpful, it could influence the perception that the customer can form about your brand going forward. Be sure to incorporate social media mentions as well as responses to the strategy for customer satisfaction.

Close the loop with unhappy customers  

closed-loop feedback is an effective method to decrease churn that is not needed and transform unhappy customers into loyal ones. With this approach, companies are proactive in reaching out to customers who have been deemed detractors or complainants and then intervening before problems escalate and cause a break-up of the customer-business relationship. In many instances, this focused approach and attentive listening on the part of the business can make the relationship more effective than it was originally. It’s an important part of your customer experience management plan.

Retargeting

The most effective strategy to increase customer value over time is to engage customers who have had an earlier encounter with the brand. Retargeting is a straightforward reminder of the brand, and, at a minimum, it can increase the brand’s recognition. Products with a shelf-life will greatly benefit from the retargeting process since their time-sensitive nature means they will require a second purchase.

The value of a customer’s lifetime is a measure that every business must consider when planning for growth in the future and estimating their profits pro-forms. Businesses must implement strategies to improve the value of their customer’s lifetime, particularly since the expense to keep an existing customer is significantly lower than acquiring a brand new one.

Conclusion

The value of a customer’s lifetime goes in with retention of customer satisfaction, customer satisfaction, and loyalty to the brand. It’s the financial benefit of having regular customers. Businesses that have high CLV can increase their revenue without the need for the cost of advertising and enjoy a steady cash flow.

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