Although it may not seem important, the customer lifetime value (CLV metric) can make you stand out from your competitors.
CLV is a measure of how well your products and services are connecting with your customers. It also tells you what your customers think about your products or services.
Who wouldn’t want that information for their business or marketing campaign?
Although math isn’t for everyone, it’s a skill that can be learned. However, the ability to calculate lifetime value does not require high-level math.
You can also continue to calculate this metric to create map points as you grow your business.
If your customer lifetime value rises, it means you are making a positive impression on existing customers. The experience can be reverse-engineered for future customers.
First, let’s look at customer lifetime value. How can you increase your customer lifetime value for your business?
What is the Customer Lifetime Value (CLV),?
The customer lifetime value, or lifetime value (LTV), refers to the average amount that customers spend on your company throughout your relationship.
If a customer keeps buying products or services from you for 10 years and spends $10 each year, then his or her lifetime value is $100. This excludes any money that you have spent to acquire the customer.
Imagine selling socks online from an E-commerce store.
To attract customers, you spend $5 on advertising. For 10 years, he or she will buy an average of seven pairs per year. You make $10 on each pair.
This data shows that you make $70 per customer each year, which is $700 over a decade. The net customer lifetime value is $695 when you subtract the money spent to acquire that customer.
Although it is a simple example, it shows important data.
The importance of customer lifetime value
Customers are more than just the money they spend today on your business. If you can retain them as customers, they will be of future value.
We considered advertising in the above example. We spent $5 to attract one customer, who ended up spending $700 in our fictional online store.
What if those 70 socks were sold to 70 different customers?
To acquire customers, we would need to spend $5 per customer. This would significantly reduce our profits. Our brand loyalty would also suffer.
It is vital to consider customer lifetime value because the more customers you have, the higher your profits. While you will always need to spend money to acquire new customers or retain existing customers, the former cost five times more.
You can increase your customer lifetime value by knowing what you know. You can retain your customers through email marketing, SMS marketing, and social media marketing. While you still need new customers, don’t forget the ones that are already there.
How to calculate the customer lifetime value
There are many ways to calculate CLV. You can either use historical or predictive methods to calculate the customer’s lifetime value.
Also, CLV can be calculated based on the actual purchase history over time or on predictions of what customers will spend.
You need to know your average profit margin, the cost to acquire customers (customer acquisition costs), and the length of your customer relationships.
Your business model can have an impact on how you calculate customer lifetime value. It’s much easier to calculate customer lifetime value if you are in a subscription than if your business is e-commerce. This is because sales are more predictive.
BarkBox and ButcherBox both charge the same monthly delivery fee, while their customers pay either monthly or annually. It is difficult to predict when a customer will buy socks online again.
Customer Lifetime Value Formula
The historic model is the simplest formula for customer lifetime value. CLV equals the total transaction value multiplied by your average Gross Margin.
Let’s suppose a customer visits your site 10 times and spends $10 each.
After taking into consideration how much it costs to get customers to spend money, your average gross margin is $5. This means that you will multiply $100 (the total amount) by $5 (your average margin) to get 500.
You will need to be a bit more complicated if you are going to use predictive analytics.
The average customer lifetime value formula is dependent on several data points
- Average monthly transactions
- The average amount spent per transaction
- Average loyalty of your customers over the last month
- Average gross margin
These numbers can be multiplied together to get the predictive CLV.
9 ways to increase your customer’s lifetime value
How can you increase your CLV now that you are familiar with how to calculate it? These nine tips will help you increase your customer lifetime value while retaining more customers.
1. Segment your SMS and Email Lists
Marketing to customers via SMS or email — or both — ensure that they are segmented according to where they are in your sales funnel and what their interests are.
A person who is interested in your activewear collection won’t be as interested in your dress socks as someone who wants it.
Similar to the previous example, if a customer was introduced to your brand via an educational blog post, they probably aren’t ready for purchase.
He or she does not need the same messaging or content as someone who has shown intent to buy.
A segment is also needed for repeat customers. These people will be important to you and your website.
Marketers focus too much on attracting new customers, forgetting about the ones who have already invested money in their businesses.
Once you have segmented your customers, drip campaigns can be used to nurture them. Do not bombard them with sales messages. Instead, establish relationships with them
2. Create products or services that complement existing offerings
Many factors will affect the number of products and services you sell. These include whether your customer is likely or not to buy more of your product or service.
A person who sells socks is more likely to sell washing machines than one who sells socks. More people need socks than washing machines.
To encourage more sales, however, you can create products and services that complement your existing product or service line.
You might sell washing machines and your detergent. Customers who purchase your machine may also desire detergent that is made for it. They might become regular customers.
You might also sell a single great product that people purchase over and over. Instead of trying to create something new, you should focus on selling your product as a gift idea.
3. Enjoy the Freemium Model
In-app purchases are one of the best ways to increase customer lifetime value. Candy Crush is free to play, but you can purchase additional lives or boosts to the game by spending real money.
This model improves customer lifetime value as customers can try your product and then decide to buy it.
Candy Crush was able to make nearly $1 billion in just one year. This is quite impressive for a company that creates games people can play free of charge.
You could offer other levels of flexibility and features if your business isn’t suited to the freemium model. You might make three blenders with different efficiency levels and prices. This will give your customers more options and allow them to upgrade to a better model, which can result in more money.
4. Regularly send out coupon codes and other special offers
Coupon codes are often overlooked. People love to get deals, so even if you have a 10-percent discount coupon, they will still be a good deal.
It is up to you when to send your coupon codes and other special offers.
You can increase customer lifetime value by sending a coupon code to your customer a few weeks after they make a purchase.
Because the transaction is still fresh in the customer’s mind, he/she will be more likely to return to your website and look at other products and services.
Offer a discount for the purchase of more than one item. While you are encouraging customers to spend more, it still feels like a deal. Packages of products and services work for a reason. Bundling your Internet and TV service can help you save money.
5. Make use of thank-you emails
Business is a lot easier when you show gratitude. It is also a great way for you to stay in touch with customers.
Thank-you emails are messages you send to customers after they have purchased something from you. It doesn’t ask for anything, it simply lets customers know that you appreciate their business. You might also include a coupon code as a complimentary gift.
It is important to get in touch with customers immediately. To encourage repeat visits to your site and, hopefully, repeat sales, keep your brand in mind.
A thank-you email can be used as a starting point for a new drip program. You might also send a survey to find out the customer’s opinions about the transaction a few days after you have sent the thank-you emails. This can help increase the customer’s lifetime value.
6. Funnel Traffic from Social
You might be followed on social media by someone who buys from your company. Don’t miss this chance.
Stay in touch with your customers through social media and send them offers to return to your site. To show your appreciation, send out lots of thanks to people who purchase your products or services.
Your online presence may have been limited to your website at one point. This is no longer true. To keep traffic flowing from one website to the next, you’ll need to make contact with all potential customers.
Your brand awareness can increase customer lifetime value.
7. Seamless buying experience
Many people don’t buy products from the same company again after having a bad experience.
Customers become annoyed if they aren’t given enough information or time during the purchase process.
Customers who have a smooth buying experience share it with friends. Customers let their friends know that they can buy a product or service from you and that it is easy to purchase.
You might consider offering more payment options, reducing the number of fields, and estimating shipping costs right from the start. Do not put obstacles in your way that could discourage new buyers or cause customers to stop buying from you.
8. Use checking-in emails
Dormant customers are another great way to increase customer lifetime value.
These are people who bought from you in the distant past but have been inactive for long periods (e.g. six months).
You can send an informal email asking them how they are doing and if they’re interested. If they aren’t interested, you can allow them to unsubscribe from your emails.
Although it might sound like a negative thing, cleaning out your email list can make a big difference in your business.
Don’t send spam to people who are not interested in hearing from your company.
People who are still interested in hearing from you may recall how much they enjoyed your products and services, and their return. This will increase customer lifetime value.
9. Offer a loyalty program
Do you want your customer’s lifetime value to skyrocket? Create a loyalty program. Customers can save money and earn points toward future purchases.
Loyalty programs are a common feature in brick-and-mortar shops, from Walgreens and Best Buy. They work. Even if your business is online only, you can offer your customers the opportunity to save money by continuing to purchase from you.
Conclusion
It is more important than you realize that customer lifetime value matters. It has an impact on customer retention and reveals how much brand loyalty you command. This helps your business to stay in the black.
Now is the best time to get involved in improving CLV.
As much as possible, focus on keeping customers. Use Crazy Eggs heatmap tools for insight into where customers click, how far down they scroll, and other information to optimize your website for the best shopping experience.
Your business will earn more revenue if you invest more time in customer lifetime value.
