Many companies focus more on acquiring new customers than retaining existing clients. Failing to build a relationship with people purchasing from you can drive them away. Not only that, but it pushes your customer acquisition costs (CAC) through the roof. Increasing your formula for customer lifetime value (CLV or customer LTV) should be one of your top priorities on the business growth to-do list.
Let’s see why the CLV is a crucial business metric, why and how to measure it, and how to improve it.
What is the customer lifetime value (CLV)?
Customer lifetime value refers to the revenue you generate from a particular customer throughout your relationship. It’s a critical metric for business growth, as it includes all orders from a specific customer, indicating product-market fit and brand loyalty.
The value of the customer lifetime metric can give you an insight into your buyers’ interactions with your brand and your marketing, sales, and SEO strategy’s effectiveness.
It can be an excellent foundation for your market segmentation strategy, essential for enhancing your marketing strategy.
You can use it to segment your target audience according to their shopping behavior. Then, tailor your content, products, and services to improve their experiences with your brand.
Benefits of measuring your CLV
The most notable benefits of measuring the value of the customer lifetime include:
- Better customer retention: Tracking your CLV and improving market segmentation can help you determine what works and what might need an adjustment. You’ll understand your customers’ purchasing habits to personalize their experience, retain them, and inspire loyalty;
- Higher profitability: Your CLV can help you identify high-value customers and top-selling products or services. You’ll know how to keep clients, encourage them to spend more, and attract similar consumers;
- Repeat sales: The CLV metric shows how many times someone has purchased from you in a year or over their customer lifetime to help you make strategic decisions for repeat business;
- Data-driven forecasting: Once you know what revenue each customer brings, you can adjust your CAC to prevent overspending or underspending. Adding behavioral data to predictive CLV models can also help you reduce CAC and improve future planning.
How to calculate your CLV
The formula for calculating your customer lifetime value is as follows:
CLV = Average Order Value x Number of Orders x Retention Period.
For instance, let’s say a customer has visited your e-commerce shop approximately five times a year for seven years with an average order value of $50. Multiplying those numbers would give you the CLV of $1,750, the total revenue that one customer has brought into your business.
A higher CLV means more loyal customers who make repeat purchases and can get you more referrals.
Furthermore, a favorable customer CLV is at least three times higher than your CAC. For instance, if your marketing spending to acquire a particular customer is $100, you should generate at least $300 from that customer’s purchases during their relationship with your brand.
How to increase your customer lifetime value
The latest customer retention statistics show that retaining an existing customer costs 6-7 times less than acquiring a new one. Additionally, increasing retention by 5% can boost your revenue by 25-95%.
Therefore, increasing your CLV is critical for long-term business growth, and here are the best practices to follow:
Improve customer onboarding.
Customer onboarding is the nurturing process that sets the tone for every new relationship and compels buyers to return.
Hence, always provide immediate value from initial interactions and welcome emails to follow-up emails and product walkthroughs. Incentivize customers to return by being straightforward and transparent and building relationships and trust.
Provide a seamless buying experience.
A frictionless buying experience leads to more conversions, sales, and repeat purchases. Thus increasing the formula for your customer lifetime value.
That means fewer form fields, transparent shipping costs before the checkout page, and multiple payment options. As well as, accurate product descriptions, a smooth checkout, and a stress-free product return process.
Build meaningful relationships.
Email and social media marketing are the keys to better customer relationships. You can use email for nurturing and social channels to interact daily with consumers and turn them into brand ambassadors. Social networks are also perfect for driving more organic website traffic.
Monitor social media mentions to see what people say about your brand and understand how to address their needs, pain points, interests, and preferences.
Increase the average order value.
Upselling and cross-selling strategies can help you entice customers to spend more. Complimentary products work like a charm, but product bundles also can do the trick.
However, the key is to compel consumers to increase their order value by offering a high-end deal. It could be a more expensive product or service that brings more value, multiple products at a discount, or several items that go perfectly together. You can also offer freebies on orders over a specific value.
Encourage repeat purchases.
If you offer SaaS products, streaming services, and other monthly or annual memberships, you can encourage repeat purchases to drive each customer’s lifetime value.
Otherwise, you can email reorder reminders and offer discounts, coupons, and vouchers for saving on their next purchase.
Offer a loyalty program.
A loyalty program can boost sales and revenue, retain customers, and attract new clients. Who doesn’t like earning points on every purchase to save on future orders or snatch excellent rewards?
Rewarding loyal customers is perfect for driving repeat sales and increasing their lifetime value.
Provide exceptional customer support.
Email, phone, and live chat support are paramount for better customer experiences and relationships.
Having a responsive, professional, and helpful support team will help you build trust, credibility, reputation, and long-term loyalty. This is one of the top keys to the formula for customer lifetime value.
Conclusion of The Formula for Customer Lifetime Value
Therefore, increasing your customer lifetime value is essential for business growth. That is because a higher CLV equals more revenue. And more revenue means your marketing and sales strategies work.
Measuring this metric will help you boost customer retention, satisfaction, and loyalty. Therefore, shooting your profits through the roof.
Finally, what is your formula for customer lifetime value? I’d love to hear about it in the comments below.
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