Worth the Chase? A Look at Customer Lifetime Value
The burning question for every marketer, business owner or strategist out there - how can we create value for our customers? Well, what about the value your customers provide you? This article takes a look at traditional customer lifetime value and how to calculate it, but also the value of your customers in a broader sense.
Sure, customer lifetime value is the ultimate measure, but what other value can customers bring? Brand advocacy, data provision and referrals are just the beginning. Let’s turn the tables and find out the value your customers can provide you.
Customer Lifetime Value.
The ultimate calculation. Customer lifetime value measures the value of a customer to a given business over the course of their relationship with that business. Why is it important?
Customer lifetime value determines how much you can or should invest in a given customer on a more granular level, but it’s overall importance comes down to cost - it costs more to acquire a new customer than it costs to maintain your relationship with an existing customer.
Who Cares about Customer Lifetime Value and Why?
Anyone with a customer base. Why? Here are a few reasons:
The average return customer will have an average purchase value of +67% in months 31-36 of their relationship in comparison to months 0-6.
Loyal customers are generally worth over 10x their original purchase.
Increasing customer retention processes and efforts can increase profits by as much as 25-95%.
Maintaining existing customers can increase your customer database by up to 100%, while this data can be used to boost your CRM efforts.
Existing customers make up to 80% of the revenue of your company.
Loyal customers spread the word about your company.
80% of revenue comes from the top 20% of customers.
Retained customers will purchase more frequently and spend more.
Businesses have a 70% chance of selling to an existing customer, while this becomes just 5-20% for new prospects.
81% of marketers say tracking CLV boosts sales.
How Much Are Your Customers Worth?
This question is open to interpretation. Let’s take a look at the simple side of things first: they’re worth their CLV.
Calculating Customer Lifetime Value (CLV)
In the most straightforward sense, there are 5 basic steps to the customer lifetime value calculation. There are more ways than one to calculate CLV, but we recommend following the steps below for the most consistent and reliable results.
There are many variables, some measurable and some not, that impact customer lifetime value. Some of these include customer churn rates, gross margins, acquisition costs, even customer segments. Understanding the components of each step below and how you can influence the variables is a great first step to better serving your customers - and yourself.
P.S. Look out for the tip at the end.
The first step is to look at average purchase value. Simply take your total revenue from sales and divide it by the amount of purchases for a given time period.
Next up, take a look at your average purchase frequency by taking the number of purchases for the same period and dividing that by the number of customers that purchased in said period.
Step 3 is customer value. Simply take the answer from step 1 (average purchase value) and divide it by the answer from step 2 (average purchase frequency).
Almost there! Step 4 of 5 is to calculate average customer lifespan by dividing the sum of all customer lifespans by the amount of customers for that given period.
Finally. The final step of 5 - multiplying your average customer value by your average customer lifespan. The true customer lifetime value formula. There you have it, your very own customer lifetime value.
Tip: If you decide to incorporate a loyalty program into your strategy, remember that CLV should be calculated less redemption costs, as your margins may be cut by the rewards or discounts you offer - don’t worry, it’s worth it in the long run.
Now let’s take a look at the more abstract side of things: Referrals, brand advocacy, feedback, data provision, network effects and more. The truth is, you can’t measure the value of a customer based on these - you could, but you’d probably lose all your hair in the process. But you should be aware of these metrics nonetheless.
Although it’s not advisable to attempt to measure all these things in a model of overall customer value, these are important metrics - those you can measure, at least.
Tradition Is Dead.
Customer value, or customer lifetime value, is traditionally the overall worth of a customer over the course or ‘lifetime’ of their relationship with any company. What’s interesting is how this measure has stood the test of time while being quite shallow.
Sure, customer lifetime value (CLV) is a perfectly useful measure and can contribute significantly when trying to determine how much to invest in a given customer. But what about their investment in you? Many companies make the mistake of turning a blind eye towards what a customer can do for them.
You’re there to please your customers. We get that. You don’t want to risk bothering your customers in any way. Completely understandable. But why neglect the added value of customers when it’s there for the taking?
What Value Can My Customers Contribute?
Sales. Everyone knows that. Besides from sales, customers can create value via referrals, brand awareness and advocacy, brand image and even network effects where applicable.
Referrals: Customers acquired through referrals have a 37% higher retention rate than their counterparts, while being 81% more likely to engage when the brand has a loyalty program.
Network effects: Although this is somewhat niche, network effects exist in multiple different forms. First of all, network effects are visible within loyalty programs when gamification, tiers and levels become more involved. Secondly, if your product is directly subject to network effects, you can create additional value from each respective customer - up to 70% of your value, in fact.
Data: Data is gold nowadays. You can forecast demand, manage customer relationships, increase retention, tailor your offerings and more. Maintaining and acquiring customers greatly increases the data you have at your disposal, and this data can be put to use to inject actionable insights into your strategy.
Brand advocacy: While referrals are generally incentivized and rewarded, brand advocacy is not necessarily rewarded or incentivized. Brand advocacy is generally in the form of word of mouth, which has been shown to increase marketing efficacy by as much as 54%.
Brand image: To a certain extent, customers can create value in terms of your brand image. In the early stages of certain businesses, getting the right people to use your products can help more than any campaign to foster your brand image. Science agrees, showing that 3 different brand image factors have a significant positive effect on sales.
Maximizing Customer Lifetime Value.
Make it Memorable.
Making your customer experience memorable is the perfect first step to take when it comes to increasing customer lifetime value. Your customer experience, particularly in the consideration and purchasing phases, is the area where you can have the most direct impact on your customers’ perception of your brand, their purchase intention and subsequent loyalty.
60% of customers made subsequent purchases when they had positive experiences, while 65% of customers that had a negative experience never returned.
Improving your customer experience from nothing can be a daunting task - especially in the event of you not having data on your customers. If you have data on customer churn, feedback received and more, these insights are the perfect starting point for improvements.
Not sure where to start? A great starting point is ensuring that your customer onboarding process is as smooth and void of barriers to entry as possible. Not only this, but make sure that you provide your customers with the service and information they may require at any given touchpoint - online, in-store or on the go.
You have to stay top-of-mind. Your brand may be strong, distinguished, eye catching, whatever you like - but if you don’t remind people that you exist, they simply won’t remember. The goal of marketing is twofold: to control perception and influence behavior - not a simple goal, so you have to be committed.
Consistent and clear brand communication has been shown to increase revenue by as much as 33%.
To stay on top of your game, try incorporating triggers and automations into your marketing campaigns. However you manage it, manage it via a structured schedule that allows you to regularly remind customers of your latest products, offers, rewards and more.
Nobody appreciates being ignored. Your customers have plenty to say about you, whether it’s good or bad. Take the leap of faith and ask your customers for feedback - this can be through reviews, a more formal feedback process, social media mentions and more.
First of all, positive reviews can increase purchase likelihood by up to 380%, as well as significantly contributing to customer loyalty via customer satisfaction.
The format is not what’s necessarily important, but the feedback you receive could be the key to unlocking a greater customer lifetime value. Turn customer feedback into actionable insights with regular windows for feedback and analysis thereof.
Customers can often seem like tough cookies to crack - especially when you’re trying to sell to them. It’s true. The initial sale to a customer can almost take more than it’s worth, but a lot of customers are softies beneath it all. Building a rapport with your customers is something that not many companies can compete with.
Campaigns, reminder emails and push notifications are all fine, but everyone can do that. Establishing relationships with customers by connecting with them on a personal level is not something that has to be done in a small local corner shop - large corporations are excelling at this through the use of existing customer data.
Studies have shown that customer lifetime value is significantly and positively affected by brand relationship and brand equity, both from the customer and company perspectives respectively. Use existing data to monitor customer purchasing habits, preferences and more so that you can tailor your offerings on an individual basis - not to mention using the data to personally reward customers that advocate for you!
Customer Loyalty Program.
This can seem like a big step, but hear us out. Launching the right loyalty program means that you can manage campaigns, email marketing, customer data, customer relationship management, customer rewards and more from one dashboard. Not only this, but it facilitates creating an emotional connection while you’re able to reward referrals, brand advocacy and more.
Luckily for you, we’ve just made an updated guide to customer loyalty for 2022. Take a look here for some deeper insights into customer loyalty and rewards programs.
Loyalty programs can be the ultimate fix for a low customer lifetime value. Why? Loyal customers stay for longer, but also spend more per visit. This means that it’s a win-win for you and your customers - and don’t forget all the valuable data you can gather in the process.