Customer Lifetime Value is at the top of the list regarding companies with big goals of sustainable growth. As a result, calculating your CLV is a prominent practice among business owners and marketers. Although, not all approaches to this metric are equal.
The key to acquiring and maintaining a strong CLV is to optimize customer acquisition and retention costs, not simply acquiring customers cheaper. So how does one measure how well a company can attract and retain valuable customers?
Lifecycle Marketing allows for a comprehensive strategy across all screens; and by integrating data you can scale the lifetime value, retention, and acquisition of your customers. In the following article, we will showcase how to calculate, track and scale your CLV using first party data collected through Lifecycle Marketing solutions.
What Is Customer Lifetime Value?
Your Customer Lifetime Value is a critical metric in identifying how healthy your business is and how profitable your customers are. This key performance indicator is imperative if your goal is sustainable growth. Learning how to calculate, improve, and scale CLV will be a game-changer.
Not every customer is going to be profitable from their first purchase. The reason for this is because trusting the brand you support matters. Therefore, customer success efforts will be necessary for influencing their customer journey and boosting CLV, retention rates, and customer loyalty.
Comparing Customer Lifetime Value to Customer Acquisition Costs paints a clearer picture of how profitable your company is and how much you’ll be able to invest in new customer acquisition and retention.
A high CLV means each customer brings in more revenue for your company. With each client becoming more valuable, it translates to your company being able to spend more on customer acquisition and retention.
Customer Lifetime Value: Calculation
A simple way to calculate your CLV is by subtracting the acquisition cost and serving a customer from the customer revenue.
For example, if you send out a flower arrangement every year to your mother at $80 a pop, your lifetime value for that business is $400. Although, this straightforward formula doesn’t always work. Most companies are complex and require more effort. Fortunately, there are two other methods for calculating CLV.
Historical Customer Lifetime Value
Historical CLV is the sum of the gross profit, including all historical purchases for an individual customer. Determining the CLV based on profit indicates how much profit a customer is bringing to your store directly.
To determine historical CLV, follow these steps:
- Identify the touchpoint where your customer tends to create value
- Integrate records and create a customer journey
- Measure revenue at each touchpoint
- Add everything over the lifetime of that particular customer
- Use this formula: Transaction 1 + Transaction 2 + Transaction 3… + Last Transaction = Average Gross Margin (AGM)
Historical CLV considers customer service costs, cost of returns, acquisition costs, cost of marketing tools, etc. However, this method can be complicated to calculate on an individual basis and relatively impossible to consistently keep all of the figures up to date.
Predictive Customer Lifetime Value
Perhaps a more efficient way to calculate the CLV is via predictive Customer Lifetime Value. Predictive CLV is based on predictive analysis and considers previous transactions and behavioral indications that estimate the lifetime value of a specific customer.
This value will become more accurate with each purchase made and each interaction. Therefore, this method may be more effective in calculating CLV.
To calculate predictive CLV, follow these steps:
- Identify touchpoints where your customer creates value
- Identify what determines that value and if it differs from customer to segment
- Identify why a customer has moved from one moment in particular to the next
- Use this formula- (Average monthly transactions * Average order value) Average gross margin * Average customer lifespan.
Remember that calculating predictive CLV is never 100% accurate. It’s simply a prediction or estimate. In addition, the equations above do not consider the costs of retaining a customer. Although, there are ways to determine a highly-accurate and detailed customer lifetime value if you personalize the formula for your business.
How to Increase Customer Lifetime Value
Increasing your CLV can be done as quickly as switching your billing cycle up or as tricky as overhauling your entire customer support process. But, most of the time, it takes a bit more effort than less.
If you want to increase your average CLV to generate more revenue from existing customers, follow our tips below.
1. Improve Your Onboarding Process
Customer success lies in the onboarding process. This step is critical to ensure sustainable growth. Conversely, poor onboarding is the leading cause of churn. The good news is that this problem is fixable.
Onboarding is your first opportunity for authentic engagement between your customer and your product. Onboarding is your chance to make a positive impact on that individual. A strategic onboarding process that encourages users to return for more is essential and will increase their lifetime value to your company.
Onboarding should be easy and fast, and the process should be simple for the customer. In addition, walk-through guides, how-to videos, tutorials, and other content should be readily available for customers who may need them.
A personalized onboarding experience is also something that can make an impact on your customer. Remember to populate onboarding offers across several different types of campaigns. Consider making a personal offer for them, test onboarding approaches and monitor your customer health score based on their behaviors and trends. Onboarding should focus on engagement and simplicity for the customer.
2. Offer Premium Content & Keep Your Customers Engaged
Email marketing is a great way to retain customers, but you must approach it correctly. Sending value-packed content is the way, but many are still running automated drop campaigns without offering value.
The emails you want to send to your customers emphasize your brand, your product, and your service value. A few ways to achieve this would be by sending out a monthly email, for example, that includes how much money you’ve helped them save throughout that month.
Another way to make an impression on consumers is to send a monthly email informing them of how many support tickets your help desk has solved. Keeping them informed lets your customers know that you mean business and that customer satisfaction is at the top of the list.
If you are eco-conscious and your company offers green products, email your customers to tell them how much less carbon dioxide or waste they produce. Keeping them in the loop makes customers feel good about their decision to use your products.
The key to offering premium content is identifying what value your product or service is delivering. You can use this to show your contributions and efforts effectively. An email that explains the benefits you bring to the table goes a long way, especially from a CLV point of view, compared to another run-of-the-mill promo email.
Educational content is another way to go for personalized, premium content. However, personalized is the key word here. There are no sales pitches, just genuine interactions to look into your customers’ needs and find a way to resolve their issues using your product or service.
Remember that using your customer interests is another approach to improving CLV. Promote content based on interests they’ve specified or look at items they’ve purchased in the past to get an idea of what they like.
Your goal is mapping the customer journey, identifying touchpoints, and personalizing the customer experience with targeted, personalized campaigns. Doing so turns your company into a beacon of reliable knowledge in the consumer’s eyes. Always be prepared to help, be there when your customers need you, and you will be rewarded in CLV.
3. Build Better Relationships
Making the impression that your company hired a professional, proactive, and supportive team is vital. Ensure your customers feel heard and appreciated, and focus on building better relationships with your customers if you want to improve CLV.
According to our experts at Tinuiti, weak relationships account for about 16% of the average customer churn. The customer journey is the lifeblood of CLV. Every step of that journey needs to provide the customer with healthy, productive interactions, or your customer could simply turn cold to your company.
Don’t be afraid to get to know your audience, and take steps to tap into feelings, emotions, and expectations. Surveys are a great way to get your customers to provide valuable information you can review and address. In addition, surveys open up the door to make a negative situation a positive one.
Remember that your customers do have emotions. A few good examples of being sensitive to this fact and thus building a stronger relationship would be how certain companies allow individuals to opt-out of mothers day promotional texts, as it can be difficult for some women.
Certain pet companies also reach out when they notice dog food orders aren’t coming in as they usually would, resulting in a customer being surveyed as to why they are no longer ordering. This interaction allows the consumer to let the company know that their pet passed away. Then that gives the brand a chance to act, build a stronger relationship, and possibly send out a condolence note or something of that nature to the customer.
Connect with your audience for more reasons than simply selling or promoting a sale. Customers stay loyal because they think your products are superior or better than anyone else’s. Prove them right!
Encourage repeat customers by promoting additional products. For example, a mother may buy lots of nursery items or baby products. Consider sending this customer relative deals via SMS to add to their order—possibly a 15% discount on baby clothing or toys, something of that nature. This incentive encourages her to make another purchase.
Target individuals differently based on how frequently they’ve made purchases. If someone is a first-time customer, send them a discount or coupon to use on their next order and welcome them to the tribe. If they have already made five or six orders with your company, consider inviting them to a VIP rewards point program or send them a free sample or small thank you gift.
4. Collecting Actionable Feedback
You may not be able to grow your business if you don’t know what your customers think of you. Detailed, actionable feedback can help companies understand their core strengths and weaknesses.
Understanding your customer and their needs allows you to prioritize aspects of your business that fuel revenue growth and customer satisfaction. In addition, it provides a company with accurate data regarding how likely customers are to recommend your services or products to their friends or family.
Storing and collecting feedback is incredibly useful and is an excellent habit to get into. You can keep it all in one place and share this information across departments for reference. You may also want to set up a team responsible for monitoring customer sentiment online through social media, communication channels, review forums, websites, etc.
Utilize customer satisfaction surveys that ask one question, inquiring about the likelihood of recommendations to friends or colleagues on a scale of 1-10.
Based on this feedback, respondents are segmented into three categories. Promoters, Passives, and Detractors.
- Promoters = 9 & 10s
- Passives = 7 & 8s
- Detractors = 0-6
You calculate the NPS score by subtracting the percentage of detractors from the percentage of promoters.
After a customer has made a purchase, utilize that opportunity to send an SMS or email quiz for the customer to rate their customer experience. This questionnaire will give the company insight into what could be better, what needs to be changed, what should stay the same, etc.
Don’t be afraid to follow up with customers who have abandoned their carts or left poor reviews. Everything allows us to learn and do better next time.
Sending out an email or SMS to remind them of the items in their cart is a good tactic, or asking why the cart was abandoned. For example: “Didn’t find what you were looking for?” or “Not exactly your style?”
Use these as friendly opportunities to send follow-up suggestions and recommendations, and offer a helping hand if they need it.
Key Takeaways: Solutions To Scale Your Customer Lifetime Value
Regularly collect customer feedback via surveys. Be proactive and monitor your customer’s health. Reach out when it drops. Send personalized interactions based on customer behavior and interests. Inform customers about new features and useful or valuable content, and make your value visible and accessible. These are all actions your company can take to improve CLV.
Some ingredients can either make or break the recipe, some of the things you’ll want to focus time and attention on are:
- Improve The Onboarding Experience. It’s the first step of your journey with that consumer, and it should be simple and engage your customer. You want to make a good impression. Consider populating onboarding offers across multiple campaigns.
- Offer High-Quality Content That Engages Customers. Identify what area your products and services shine in, and use it to your advantage. For example, if you’re an eco-friendly company, send monthly emails telling customers how much less plastic is in the ocean because of the products they use. If you’re a brand that gives back with each purchase, highlight how much your customers’ proceeds helped give back in a quarterly email, so customers know you care and want them to be informed.
- Build Stronger, Better Relationships. Building relationships isn’t as complicated as it seems. After all, we’re not in high school anymore. Understanding your customer and their expectations is critical. Appealing to them emotionally like human beings is a great way to build better relationships since people want to feel like the brand they support cares about them. Rewards repeat customers with exclusive savings or invite them to your special rewards clubs. Give new customers motivation to shop again by sending out coupons or discounts for their next order.
- Collect Actionable Feedback & Use It! Feedback means nothing if you aren’t using it to your advantage. For example, companies have customers telling them precisely what they are doing right, what they are doing wrong, what they could improve, etc. It’s your job to pay attention to this feedback and address whatever it contains. For example, send surveys to customers to see how likely they are to recommend your brand to others and how they feel their customer experience went after placing their order online.
Email subscribers are the key into how you’re targeting individuals in other channels. Identifying users via email address or phone number will be integral to being able to collect as much zero-party data and first-party data as possible. We’ll see more aggressive efforts to collect email addresses and phone numbers so that we can identify individuals and provide more meaningful engagements across the digital marketing space.”
—Kellie Collins, Associate Director, Lifecycle Marketing at Tinuiti