Last updated on
February 8, 2023
Customer Lifetime Value or CLV is commonly used in two areas in business - customer acquisition and customer relationship management.
The goal is to understand how much it will cost you to acquire valuable customers and retain them, so you’ll know if you're making positive or negative revenue per client.
A study from Havas Media's Meaningful Brands revealed that “a massive 77% of brands could simply disappear and no-one would care. This is a three-point rise in 2017 results!”
This is a reality you don't have to face it if you can leverage customer lifetime value.
In this article, we'll focus on customer retention and how to increase CLV in the process.
This represents the expected revenue that is calculated using a dollar value or an index that is earned from a customer over their lifetime, taking into consideration all the possible products they will purchase.
The result of your calculation may yield either a positive or negative revenue.
The former refers to all actual and potential revenue that is generated from product and service sales. The latter, on the other hand, refers to possible loss of revenue due to a customer defecting before their expected lifetime.
Through measuring CLV, a business can:
There are different models of Customer Lifetime Value that are based on different calculation factors. These include sales history, future revenue earned from upselling/cross-selling, and churn modeling that calculates the loss.
Below is a formula commonly used:
CLV = (sale's average value) x (number of repeat transactions) x (average retention time)
A little complicated, right?
Here is an example calculation:
Say you sell websites that cost anywhere from $2,000 to $20,000. Most of your customers pay $5,000 on average. This is now your revenue per average customer or average sale value.
Now, somewhere along the line (6 months after a website was built, for example), your customers came back to buy a maintenance package and other services, resulting in 1.5 annual repeat transactions. This went on for 3 years on average.
So, to calculate...
CLV = ($5,000) x (1.5) x (3) = $22,500
This means, the revenue you receive from each customer over the course of a lifetime is $22,500.
From this amount, you'll need to determine your actual profit. But that's another topic for another day.
So, how do you increase the Customer Lifetime Value?
Remember churn modeling?
This factor in the overall calculation of CLV looks into the risk of a customer defecting or stopping the usage of a product or service for either 1 or both reasons below:
Both of these can be avoided or resolved by creating a positive onboarding experience.
Aim to be better than your competitors at this. Once you’ve made onboarding convenient for your clients, they’re unlikely to churn or move away from your brand.
You want to increase the number of repeat transactions during a customer's lifetime, as it is one of the components in the CLV formula.
This can be achieved by ensuring that your customers don’t forget you after their first purchase.
There are several ways you can be more visible to them.
According to the SuperOffilce, the average email open rate across all industries is 22.1%. It decreased compared to 2018. However, looking at the open rate trends, we can expect it will increase again in 2021. This shows that email marketing remains an effective tool to boost customer engagement.
Create the best strategy to send emails to your customers. Make sure each email is tailored and personalized for each recipient and then, automate the delivery process.
Automation options can take over nearly every step of the email marketing process, except content creation. Through the combination of skilled email creation and automation tools that personalize the email with consumer information, you will have an effective and engaging communication method.
Brands, both big and small, have learned in recent years that email marketing is necessary for building customer relationships. Consumers prefer email communications to phone calls, mail, or SMS. It gives the customers the power to open, view, or engage, and oftentimes they choose to interact.
Netflix, despite being a highly recognizable brand now, continues to engage their customers via email and encourage them to keep watching movies.
It's no secret that some of the biggest brands use social media engagement to acquire new customers and retain existing ones.
Like any marketing strategy, however, you need to make your business stand out.
Take a look at how MoonPie used Twitter to their advantage. Even with limitations to the number of characters you can use, there are many tricks to get your message across.
Doing so will not only increase engagement but also conversion. Burger Revolution, for example, keeps their fans informed about special items for the day via Facebook. This basically translates to a FOMO or the Fear of Missing Out strategy.
Amazon does the same by adding lines on product descriptions, such as “Only 7 stocks left.”
Poor customer service is a deal-breaker, no matter how popular your business is. And, most of the time, you get what you give. So, ensure excellent customer care at all times.
Here are some actionable tips for providing top-notch customer service:
Implement these strategies and follow customer service principles, and you'll see a significant improvement in customer retention.
There are so many things to track in business. You’re probably stressing over boosting your eCommerce sales, too, and maximizing your operations budget. It becomes so easy to get overwhelmed and lose sight of your goals. Well, you should use customer success software that will help you stay organized and make sense of the million little details about each of your customers.
Zoho CRM Plus, for instance, helps you deliver an exceptional experience to your clients via their extensive customer relationship management tools.
Gainsight, on the other hand, gives you the power to decrease customer churn and increase your revenue.
ChurnZero provides a variety of analytics tools that allow your company to analyze customer health and gives an in-depth review of both at-risk and high-profile users. It logs all activity then segments it into numerous different categories such as repeat customers, new customers, and more.
By combining detailed analytics tools and an easy to navigate the system, ChurnZero has helped many companies manage fast growth and to spur business development as well. In a case study on one of their successes, Red Canary, they showed how ChurnZero established processes that gave a higher level of customer visibility. With that, the customer success team was able to play to their strengths and manage substantial customer base growth and improve information security.
Whatever your niche or industry is, there's a tool that you can use to stay productive and profitable.
Repeat transactions are a great way to boost your CLV. You can encourage this by doing the following:
A business website is a necessity these days, and proper thought must be put into its creation. For a website to help you retain customers, it should be:
Sugarfina’s rewards program is designed to treat loyal customers.
According to a study published on Emarketer, “58.7% of internet users believe earning rewards and loyalty points is one of the most valued aspects of the shopping experience.”
So, boost CLV by rewarding loyal customers.
Now that you know how valuable customer lifetime value is to your business, you should act right away and look into data you can use to calculate CLV. Is customer relationship management costing you more money than it should?
Whether the numbers are high or low, implement the tips above to help boost customer retention and CLV.
Do you think your company has positive or negative revenue? Let us know in the comments.
Content marketer by day and book nerd by night, Momina works at Mailmunch as a Marketing Communications Specialist. Momina eats, sleeps, and breathes content marketing. Her expertise ranges from ideation to production to distribution of content, thanks to 4+ years of experience in the B2B content marketing sphere.