How can you improve customer lifetime value?

Sept. 16, 2021

Let's face it. Your customers have the biggest impact on your bottom line. Therefore, it is critical to have good relationships with your customers, so they keep coming back to purchase your products or services. Having said that, you also have to think about where to spend your money when it comes to sales and marketing: should you spend more on retaining existing customers or acquiring new ones? One metric that can help you decide is the customer lifetime value (CLV).

What is Customer Lifetime Value (CLV)?

The customer lifetime value (CLV) is a measure of how much money a customer is expected to spend purchasing from your business over their lifetime. It’s an important metric to keep track of because it allows you to make well-informed decisions when it comes to acquiring new customers and retaining existing ones.

 

As a simple example, let’s say a patron of a particular supermarket is expected to spend about $10,000 at the supermarket over their lifetime. In that regard, it won’t be wise to spend more than $10,000 to maintain this relationship. It just won’t be profitable for the supermarket.

How Do You Measure CLV?

At its simplest, you can calculate CLV as follows:

 

CLV = Average value of a purchase (in USD) * Average number of purchases made in a year * Average number of years for which a customer purchases from you

 

So, a Netflix customer who purchases the Premium subscription might be worth:

 

$17.99 per month for the monthly Premium subscription * 12 purchases (months) in a year * 5 years = $17.99 * 12 * 5 = $1,079.40

What is the Value of Knowing Your CLV?

There are several benefits to knowing and understanding your CLV. I list some of them as follows:

 

  1. It can help you boost your revenue.
    How, you ask? When you know the customers that have the highest CLV, you can better serve them by focusing on the products and services they want, making them keep coming back to you. In addition, you can find out which products have the highest profitability, thereby allowing you to focus on making them better so that more customers would want to buy them.

 

  1. It helps you retain customers and improve their loyalty to you.
    Trying to optimize your CLV can have a big impact on customer loyalty. When you try to improve your offerings and invest in customer service, which is often a result of knowing your CLV, potential customers will naturally flock to you.

 

  1. It helps you target customers that will make the most difference to your business.
    How? With the knowledge of your CLV, you can see what kinds of customers are contributing the most to your revenue, and then you can make targeted marketing campaigns to retain those customers and attract similar new customers.

 

  1. It helps you make well-informed budgeting decisions when it comes to customer acquisition.

As I alluded to earlier in the article, it doesn’t make much sense to spend money on acquiring new customers if your customer acquisition cost is greater than your CLV. But what can you learn from this? Essentially, it allows you to determine much you can spend to acquire a customer that will help you make profits.

How can You Boost Your CLV?

You’ve determined your CLV. But how do you go about improving it? Know that boosting CLV is directly proportional to increasing the likelihood of a customer spending and buying more frequently from you. Here are some tactics that can help you.

 

Improve your customer experience.

Customer experience is a huge factor that a potential customer considers when deciding on which companies to do business with. Therefore, improving your customer experience should be a critical part of your CLV boosting strategy. You can improve it in several ways:

  • Offer existing customers personalized services where possible.
  • Provide robust customer support.
  • Make it easy for customers to return items they’ve purchased from you. Making returns and refunds hard will leave a bad taste in your customers’ mouths.
  • Deliver orders on time, or even earlier if possible. If the scheduled delivery date is October 4th, for example, it’s much better to have it delivered to the customer on September 30th than on October 5th.
  • Create a loyalty rewards program to encourage customers to purchase more from you. Make sure that the rewards are desirable and not too difficult to obtain.

 

Use upselling to increase the average value of a transaction.

While browsing Amazon, you may have come across the "Frequently Bought Together" section on the store page. It shows you the item you're considering buying along with two complementary products, with the option to add all three to your cart. This is Amazon trying to get you to spend more than you initially considered, a common sales technique known as upselling. As you can imagine, using upselling to increase the average order value can have a huge impact on your CLV. Fast-food chains like McDonald's also use upselling to great effect. Just recall the number of times you've fallen for the "would you like a drink with that?" trick. Subscription-based services like Netflix and antivirus companies use upselling by encouraging buyers to purchase the annual plan instead of the monthly one.

 

Build and maintain a healthy relationship with your customers.

Customers love being loved. If you want your customers to be loyal to you, it's not enough to have a relationship based on transactions alone. You'll need to engage with them frequently to build and maintain a healthy relationship. Some techniques you can try include:

  • Take and implement feedback
  • Conduct contests and giveaways
  • Send email newsletters that include discounts and offers besides other content
  • Host local events
  • Surprise loyal patrons with gifts

 

In a nutshell, customer lifetime value is a useful metric to keep track of for any business. It informs you about the customers who spend the most at your business as well as what products they're spending their money on. If you've never given a thought about CLV before, now is the right time to start.

 

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