Bain & Company research has revealed that a mere 5% increase in customer retention rates results in a 25% to 95% boost in profit. Choosing a strategy that optimizes Customer Lifetime Value (CLV) over investing extensively in expensive advertising campaigns enables businesses to achieve their revenue objectives.
So, how can you maximize Customer Lifetime Value for the best results? This article will delve into CLV and provide tips for e-commerce stores.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV), also known as Lifetime Value (LTV), is a metric that a business uses to determine how valuable a certain customer is to their company.
The importance of Customer Lifetime Value
Enhancing the Lifetime Value of existing customers is a smart strategy for business growth. BusinessWire reports a significant 222% increase in the costs of acquiring new customers over the past eight years, especially in sectors like e-commerce.
Instead of heavily relying solely on acquiring new customers, you can:
- Identify what factors contribute to customer loyalty.
- Replicate those actions to increase the value of your existing customer base.
Identify and address customer loss
For instance, if you observe a decline in customer lifetime value and find that customers need to renew ongoing subscriptions to your product or service, you could consider launching or enhancing a loyalty program to entice them.
Improving customer support or implementing targeted marketing efforts during renewal periods can encourage customers to re-engage. These initiatives improve customer lifetime value and revive business revenue.
Identify and duplicate customer base
Customers with higher lifetime value contribute more to your business. By studying them, you’ll discover:
- What do they have in common?
- What makes them keep choosing your brand?
- Is it something they all need, a certain amount of money they make, or where they live?
You can create a whole group of customers based on these important existing customers.
After analyzing the factors contributing to high CLV and creating a customer persona, you can actively pursue new customers using this valuable information. Once you’ve successfully brought them on board, you can rely on your predictive customer lifetime value for future revenue.
How to measure Customer Lifetime Value
CLV can be analyzed from two different perspectives:
Historic Customer Lifetime Value
The historical model uses past data to predict the value of a customer without considering the customer’s loyalty to the company.
While calculating historical CLV provides a valuable snapshot of past performance, it doesn’t account for potential changes in customer behavior, preferences, or the evolving dynamics of the business-customer relationship.
Predictive Customer Lifetime Value
Predictive CLV estimates the future value a customer will generate over their entire relationship with a business. It involves forecasting a customer’s potential revenue and costs over a specified period.
This algorithmic process uses historical data to accurately predict customer relationships, including duration and value. A predictive CLV estimate considers factors such as customer acquisition costs, average purchase frequency, and business overheads. Although it seems complex, this method can help determine when to invest in customer loyalty.
→ Both methods have their merits and are helpful in different contexts. A combination of these perspectives offers a comprehensive view of customer value – helping businesses optimize their marketing, sales, and customer retention efforts.
The formula for calculating CLV can vary based on business models and industries, but a basic formula might look like this:
Suppose you run an e-commerce store specializing in skincare and beauty products. Here are some hypothetical figures for the key variables in the CLV formula: On average, a customer spends $50 in a single transaction. The customer makes three transactions (payments) a year and stays purchases for five years. In this case, 15% of customers churn per year.
- Average Purchase Value (APV): $50.
- Purchase Frequency (PF): 3 times per year.
- Customer Lifespan (CL): 5 years.
- Customer Churn Rate (CCR): 15% per year.
Using the formula to calculate the CLV:
CLV = (50 x 3 x 5)/ 0.15 = $5,000
In this example, your store’s estimated Customer Lifetime Value is $5,000. This means that, on average, each customer is expected to generate $5,000 in net profit over their entire relationship with the e-commerce store.
With this information, you can make strategic decisions. For instance, if the cost to acquire a new customer is less than $5,000, investing in customer acquisition efforts might be economically viable. Alternatively, you could use this CLV information to focus on retaining existing customers with significant long-term value.
What is a good Customer Lifetime Value?
The value considered “good” can vary across industries and business models. Here are some factors to consider:
Exceed acquisition costs
A good CLV exceeds the cost of acquiring and serving a customer, indicating that the business generates a positive return on its customer acquisition and retention efforts.
A favorable range is when your CLV is approximately 3 to 5 times your customer acquisition cost. For instance, if your average cost to acquire a new customer is $100, your goal should be to achieve a CLV of at least $400!
Achieve return on investment (ROI)
A good CLV reflects a positive return on the investment made in acquiring and retaining customers. It contributes to the overall profitability of the business.
Compare with industry benchmarks
You gain a performance overview by comparing your CLV to industry benchmarks. This ensures a precise assessment of your business’s performance relative to industry standards and aids in setting realistic targets for CLV optimization.
Align with profit margins
CLV should align with the company’s profit margins. It’s not only about the total generated revenue but the percentage of that revenue that translates to actual profit.
→ Ultimately, what constitutes a good CLV depends on the unique circumstances and goals of the business. Regular monitoring analysis of CLV, and adjustments of business strategies when necessary, are key to ensuring long-term success.
Tactics for maximizing Customer Lifetime Value
Prioritize customer experience
Every interaction between a customer and a brand, from store visits to contact center queries, purchases, product use, and exposure to advertising and social media, collectively forms the customer experience.
Enhancing this experience is a holistic effort that businesses often undertake through a customer experience management program (CXM). This process involves continuously monitoring, listening and making changes that improve customers’ feelings and their tendency to be loyal over the long term.
Create a seamless onboarding process
For service-based businesses, effective onboarding is not complex; it involves:
- Demonstrating an unwavering commitment to customer service and a readiness to address customer problems.
- Educating customers on product features and benefits to help them grasp the positive impact of the product.
- Prioritizing attentiveness to the needs of first-time customers and alleviating any hesitations about their purchase decisions.
Launch a loyalty program
Introducing a loyalty program presents an excellent opportunity to personalize the customer experience and encourage repeat purchases. You can utilize reward points or provide free and discounted products after a certain number of purchases.
Consider the example of an airline that rewards customers using their exclusive credit card with a free flight, which can be used to offset the cost of a flight or accumulate toward a complimentary one. This demonstrates the reciprocal advantages of a well-implemented loyalty program.
Offer omnichannel support
Identify the varied preferences of customers who interact with your brand and adjust your support channels to accommodate the differences. Instead of presuming their preferred channel, conduct thorough research to understand their specific inclinations.
Harness the influence of social media
Social media is crucial for customer communication and a key platform for customers to gather information about your brand. Here are strategies to harness the influence of social media for this purpose:
- Share valuable and relevant contents that reflect your brand’s personality.
- Actively engage with your audience by responding to comments, messages, and mentions.
- Identify and reach out to specific segments of your audience with personalized content and promotions.
- Offer incentives such as discounts, exclusive access, or contests to motivate customers to share and engage with your content.
- Repost customer content to highlight authentic experiences with your products or services.
- Use insights from mentions of your brand, industry, or related keywords to understand customer sentiments, identify trends, and tailor your strategies accordingly.
Resolve issues for unhappy customers
You can use Closed-loop feedback to reduce unwanted churn and turn dissatisfied customers into newly loyal ones.
Closed-loop feedback systems are crucial for businesses that are responsive to their customers’ or stakeholders’ needs and preferences. By closing the loop and frequently refining processes, products, or services based on real-time feedback, you can enhance customer satisfaction, improve operational efficiency, and foster a culture of continuous improvement.
Mastering Customer Lifetime Value (CLV) is crucial for enduring success in E-commerce. By comprehending the customer experience and gauging feedback at every key touchpoint, businesses can initiate improvements in the key drivers of customer lifetime value. This strategic approach enhances financial performance and cultivates lasting connections with the customer base.