What is customer lifetime value and how can I use it to improve my revenue.
Move aside ROI. CLV is here!
Marketers have to try and understand, make sense from a lot of data in order to draw patterns and infer which marketing effort or channel has given them their return on investment. While ROI is great and is necessary to be looked into in any kind of business, CLV, also known as customer lifetime value is the single most important metric to understand your customer. Based on the customer lifetime value, businesses can take decisions in various departments such as sales, marketing or even business development.
What is Customer Lifetime Value?
CLV is the prediction of the net profit a company makes from their customer. Based on the current relationship, marketers will be able to forecast a customer’s monetary worth to their company and therefore plan the amount they intend to spend in acquiring a new customer.
Why is CLV important?
80% of your revenue can be attributed to 20% of your customers
When you are able to determine the CLV of your customer, you will be able to take educated decisions of your business. These questions below can be easily answered if you know your customers CLV.
- How much should I spend on acquiring new customers?
- How much should I spend on retaining existing customers?
- Which segment of my customers is worth pursuing and at what cost?
- How do I maintain good relationships with my performing customer? Send offers, special discounts, early access etc.
- How can I reduce my churn rate?
- How can I increase my revenue and upsell to my current customers?
According to Kissmetrics, the average value of a lost customer is $243.
How to calculate CLV?
There are many methods to calculate your customer’s lifetime value. If you are looking for a simplistic approach, subtract the total revenue you earned from a customer with the amount you spent to acquire him/her. This is also called the Historic CLV.
CLV = Total revenue from Customer A – Amount spent in acquiring customer A
Another way to get accurate results would be to use the Predictive CLV method. Using this method, you can understand the customer’s worth and also how this value would change over time. This route is preferred if you are planning your advertising campaign.
The beauty about CLV is that it provides a shift in your thinking process. Marketers look for customer acquisition at the lowest cost possible. While this method works on a temporary level, in the long run, these acquisitions may not yield loyal customers to your brand. Therefore brands end up spending more dollars in advertising to reach customers. CLV, on the contrary, helps business look for the best acquisition method that provides more value.
How can I improve my customer’s CLV?
After spending thousands of marketing dollars, your customers don’t stick around and buy from you. I know that feeling and it sucks. Here are six easy, actionable steps for you to take that will help you retain your customer.
Upsell – A customer is loyal to you because he likes your brand. Period. You need to see ways to get him to ‘up’ his purchase with you. The good thing about loyal customers is that you don’t have to hard sell your brand. The familiarisation, trust and market perception is already established. Focus on your offering and get them to buy again.
If a customer has bought a shaving razor from you, upsell your shaving foam. He has already bought a product from you and this makes it an ideal upsell.
Listen – When you listen, you hear even the unspoken. Ask your customers for feedback and take it seriously. Work on it to improve your product or service. Most times, brands fail because they are not constantly improving, feeding to the emerging needs of the market. When you ask your customers for feedback, you are doing two things.
A) Getting real market validation to improve your product or service and
B) Making them realise that they are important and their feedback is taken seriously.
Engage with your fans – The power of social media is immense. Engage with your fans, compliment them, mention them in your post and keep it active. If you are making someone feel good about themselves for something they did, psychology says that they tend to stick around longer. Resort to social media to keep your brand active.
Offer something that is valuable – If I am at a store looking for toothpaste and I find two brands offering them at the same price but one has a free toothbrush with it, I will pick the latter. Customers are always looking for value. Offer something valuable that your competition does not offer helps you retain your customer and not lose them to competition.
Provide quality, consistently – The famous adage still holds true. ‘Focus on quality and quantity shall follow’. If you want your customers to last and keep buying from you, your offering should be of superior quality. However good your customer service or your marketing communication is, it will fall flat if you don’t have a good product offering.
Be Honest – In order to build long-term relationships with your customer, be honest with them. Put their interest before yours, try and solve a real issue that they face and you are on the road to building a customer for a lifetime. Offer your skills and knowledge that goes beyond the product you wish to sell. Your customer will appreciate your honest intention and come back buying from you.
Personalise – Understanding your customer’s past purchasing behaviour pattern and offering something that is relevant to him or would interest him would result in a higher conversion. It could be his experience while visiting your website or an email you send him with an offering. When your customer feels that you have understood him and are taking to HIM and not the masses, you are building brand loyalty.
Any guesses on what would happen with an increase in your brand loyalty? Yes, you are right.
It gives you Retention. That, in turn, translates to an Increase in the customer lifetime value with your business.
What are the methods you have employed to improve you CLV? Write to me and I would be happy to add them to my post.