It is among the most influential information you can have as you fight the business environment today – what a customer actually means. But not the one that sells right away, but the relationship and the revenue that customer generates in the long run. And that is where Customer Lifetime Value (CLV) comes into play. CLV can be used as a number to enable organizations to take better, data-driven decisions on everything from marketing to customer service.
We will talk about CLV, its purpose, and how you can optimize it to get business growth for the long run in this blog. From small start-up to enterprise, knowing and optimizing CLV can help your bottom line.
What is CLV (Customer Lifetime Value)?
CLV (Customer Lifetime Value): It’s the total revenue that a company can generate from a customer over the lifetime of the relationship. But rather than just the first sale or the first purchase, CLV considers the customer journey from acquisition to retention and beyond.
CLV is very important as it allows businesses to see the amount, they can afford to spend on getting new customers and holding on to those they already have while keeping profits. It’s a better representation of how much each customer contributes to your business over time.
Simply put, it’s a reply to the following question:
“How much money will we earn from this customer in a year, five years, 10 years?”.
Formula for CLV
The calculation of Customer Lifetime Value is going to be different depending on your business, but here’s an example formula for subscription businesses:
CLV=(AveragePurchaseValue)×(AveragePurchaseFrequency)×(CustomerLifespan)
Where:
- Average Purchase Value is the value of the customer spend on average.
- Average Purchase Frequency: is the frequency of a sale by the customer.
- Customer Lifespan: Customer Lifespan is the number of days the customer stays with your business.
If you aren’t a subscription-based company, then the formula might be slightly different but the gist is still the same: what revenue a customer will bring in during their lifecycle.
Why CLV is An Important Number for Your Business?
Since you know what CLV is, let’s get a bit more specific about why it’s a must-have for businesses. CLV affects all of the business strategy, from marketing to customer service to growth.
1. Marketing Spend Allocation
It’s probably the best aspect of learning CLV because you know it makes marketing dollars work in businesses. Once you know how much a customer will spend over their lifetime, you know how much you can afford to spend on acquiring them.
For example, if your CLV is higher, you can spend more on paid advertising or other lead generation to bring in new customers. Alternatively, if CLV is low, then you’ll need to lower acquisition or customer lifetime value in order to stay in profit.
2. Customer Acquisition Cost (CAC) vs. CLV Comparison.
One such important correlation that CLV shows is the CLV / CAC ratio. CAC is the price paid for a new customer and in comparison, to CLV it tells you whether your strategy is long-term.
If your CAC is too high on CLV you’re probably spending too much on attracting customers who won’t deliver enough value long-term. The higher the CLV, the more CAC you can pay and stay profitable. If CAC is more than CLV, you know that your CATS is out of whack.
3. Improved Customer Retention Strategies
CLV doesn’t focus on new customers only, but also retention of existing customers. The longer a customer stays with you, the more money they make. High CLV is often the outcome of exceptional customer service, loyalty schemes and regular communication keeping your customers coming back.
Improved CLV motivates organizations to focus on retention rather than acquisition. Maintaining current customers is more economical than getting new ones. If you can improve customer retention for instance by 5% you will have an excellent boost to CLV and profit as you won’t have to spend on marketing anymore.
4. Data-Driven Decision Making
If businesses have the correct CLV data, then it is a key data-powered decision-maker for the entire organization. Whether you’re changing product features or lowering your pricing, with CLV you know what is working and what is not, and make every business decision driven by the long-term bottom line.
5. Prioritizing High-Value Customers
CLV is used to categorize the customers’ value-streams so companies can segment their customers. This segmentation can help you hone in on the high-value customers who create the longest-term return. With customized deals, VIP content, or loyalty points, you’ll be able to leverage their lifetime value and have more successful relationships with them.
What To Do to Increase Customer Lifetime Value (CLV)?
You won’t be able to increase CLV overnight, but if you approach it in the right way, you will start seeing incremental increases in long-term value your customers generate. Following are a few ways you can increase CLV:
1. Enhance Customer Experience
A seamless, positive experience is the single most successful measure of CLV. if they’ve had an excellent experience with your brand, they will be more inclined to come back, buy from you again, and share your brand with their peers.
Try to get into these areas:
- Customer Service: Offer a fast, professional and excellent customer service where the problem is fixed in a matter of hours.
- UX: The user-friendliness, ease of use and mobile-friendly design of your website or app.
- Personalization: Identify the customer’s preference with the help of data to tailor communications and product recommendations for them.
2. Upsell and Cross-sell
Upselling and cross-selling are some effective methods of selling more money to your customers. Upselling is when you ask customers to buy a more expensive product or service, and cross-selling sells complementary products.
You can, for instance, upsell someone to a higher-end laptop after they’ve purchased one or cross-sell them an accessory (laptop bag, mouse, extended warranty). Be sure to customize your upsell and cross-sell deals for each customer based on his needs and wants.
3. Implement Loyalty Programs
Loyalty programmes can reward repeat customers for returning and continue to purchase the products. These programmes can be anything from point-based systems to ascendant tiers or exclusive benefits for members. If you reward customers for their regular purchases, you emotionally connect to your brand and they come back for more.
4. Improve Product or Service Quality
Customer will stay if he/she keeps receiving good product or service. : Always refining your products according to customer reviews, market trends, and performance metrics will establish loyal customers in the long run.
5. Offer Subscription Models
In B2C and B2B markets, subscription model is also becoming the rage. Subscriptions are also the guarantee of stable, recurring revenue, which also prolongs the customer lifetime value. Monthly service, membership, product delivery, subscription plan keeps customers satisfied and returning.
6. Provide Excellent Post-Purchase Support
Don’t let the relationship end after you sell them something. Exceptional after-sales service will help you convert your first-time customers into repeat customers. Recall emails, satisfaction surveys, and customer support all make customers feel like they are important and taken care of after they have a relationship with your brand
7. Segment Your Customers
No customer is the same as another customer on their lifetime value. You’ll also know what to advertise to and retain your customers by segmenting them based on purchase history, spend, and engagement. The value customers can be catered for with perks, the inactive customers could be fostered with re-engagements.
8. Encourage Referrals
Referral marketing can get you new customers who have the same lifetime value as your loyal ones. Sponsor customers that refer friends, coworkers, or family members to your business. It doesn’t just help with CLV as the referrals are low cost of customer acquisition.
9. Invest in Customer Education
Enlightened customers will do more than just consume your product or service; they will use it over time. Value-added content (Tutorials, webinars, FAQs, and customer success materials) will make sure that your customers get the most out of their purchase and stay loyal.
Conclusion
Customer Lifetime Value (CLV) is not a number, it’s an important metric that affects just about every element of your business plan. If you know CLV, and strive to improve it, you’ll be better able to use it to make better marketing decisions, establish more loyal customers, and ultimately, achieve long-term growth. From customer experience to loyalty cards to personalized marketing, the CLV improvement ideas are endless.
If you work on retention, personalization and value-added services, your company will unleash the true potential of every customer and stay profitable for the long run. If you calculate, track and optimize CLV, you’ll build a more sustainable business model that will last a long time in today’s marketplace.