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Definition of Customer Lifetime Value Formula
Whatever type of business you have, Customer Lifetime Value (CLV) modelling is vital in order to understand the total worth that each new customer represents for your business. This can help to set a more accurate cost per acquisition. Using this for future marketing initiatives enables a company to take a longer term view of its customer acquisition strategy.
By understanding customer lifetime value, companies can also realistically discount products and services in a way which enables lower margins (by being more cost competitive) and longer term profitability.
When trying to calculate CLV, you need to take a number of factors into account. The simplest way is to take the revenue earned from a customer and subtract this from this the money spent acquiring and servicing them.
You can work out the CLV historically, over a set period of time or, use it to project revenue. Predictive CLV is a great way of looking at what a customer is worth now and is likely to be worth in the future but it’s important that you use robust sales data from your own business.
Applying the customer lifetime value formula across all customers
So how do we calculate the lifetime value of customers? Follow these simple steps:
Step 1: Calculate the profit contribution from your customers across the current year.
This is total revenue minus costs (cost of goods, customer service and overheads.)
Step 2: Develop a realistic estimate of how long you might retain each customer.
This is how long an average customer remains loyal and it retained by the business.
Step 3: Estimate the average cost to acquire a customer.
Add up the costs of all marketing for the year and divide this by the number of customers that were acquired for the year.
Average CLV = (average profit per customer) X (number of years retained) – (customer acquisition cost)
Understand the value of individual customers to boost profit
Not all customers have the same value so, knowing which ones to focus on is essential if you are serious about boosting profits. An alternative way of working with CLV is to analyse your company’s sales data and group customers into low, medium and high spending customers.
Once you know the customers that are most profitable, you can invest more in marketing to those higher value customers in order to retain them for longer.
Once you get the hang of working out the CLV, you can play with the numbers to see how the number of purchases per year might increase business profitability. Increasing CLV (particularly among the highest value customers) may even allow you to reduce marketing costs.
5 strategies to increase Customer Lifetime Value
There are many things that you can do to increase CLV. Here are 5 strategies that you can try out:
Building long-term relationships is a great way of increasing revenue whilst keeping expenses low:
- Always be honest – look after your customers; even if it means offering a discount. By focusing more on looking after them than following the money, the customer will see you as being far more altruistic with higher standards and you’ll retain them for longer.
- Share – share your skills and knowledge with customers for free, boosting their confidence in you whilst making them aware of additional products.
- Be a partner – create a strong relationship that is mutually beneficial and builds trust.
Create brand loyalty
Brand loyalty increases CLV as buyers will try new products, repeat purchase and will be retained for longer with you. Three key factors influencing brand loyalty are: quality, customer service and shared values. Use your company mission statement to demonstrate your values and always exceed their expectations!
Always upsell and cross-sell
This allows you to increase average order size. Upselling is where you sell the upgraded premium version of the product that the customer is considering purchasing. Cross selling where you sell complementary products to the product that the customer is in the process of purchasing.
Choose the right rewards and incentives
Use an incentive which holds the customers’ attention and retains them – some examples of this are exclusive offers or value-added rewards. Discounts also reduce the perceived value of items so use freebies in order to maintain the perceived value of paid-for products or services.
When choosing your incentive, It’s always worth bearing in mind:
- Communicate – tell customers about incentives
- Ensure rewards are attainable – they should ideally be perceived as high value and at last equal to what the competition are offering.
- Make them a brand-fit – it must be in keeping your brand.
In a report by Salesforce, State of the Connected Customer, 2018, “56% of customers actively seek to buy from the most innovative companies.”. Always maximise your channels of communication i.e. meetings, phone, web, social media, etc.
15 ways to increase CLV with examples
So how can companies increase CLV? Here are 15 tactics that you can try out:
- Personalisation – Econsultancy and Monetate reported through their survey, The Realities of Online Personalization, shared that “94% of marketers and 90% of agencies agree that “personalisation is critical to current and future success.”. At the same time, 66% cited improved business performance and customer experience as key drivers for personalising website experiences. Check out these amazing facts about personalisation from VWO and how it can change your business.
- Don’t charge for returns – whilst there are costs involved, free returns need to be judged against extra conversions and the boost to retention rates. Research has shown that clients who make frequent returns are often top customers; for example, expensive shoes can have a 50% return rate.
- Fitting tools and virtual wardrobes – this can help to reduce fit-related returns of products.
- Give precise delivery times and keep to them – don’t extend delivery slots and waste customer time. Offer to deliver to a work address or text customers to give a delivery window.
- Provide multichannel returns – providing a facility for returned items to be taken back to a local store is vital. Whilst customers are in store, you can also provide great customer service or even upsell/cross-sell. Customers love this added flexibility.
- Surpass customer expectations – take a leaf out of Amazon’s book – a brand who frequently comes out top in customer satisfaction surveys – fulfil orders on time and beat delivery dates.
- Reward loyalty – give rewards or some kind of exclusivity to strengthen brand affinity – i.e. creating an online club with exclusive premium content and access to events.
- Excellent customer service – Zendesk found that consumers rank quality and customer service as key factors effecting their loyalty, standing at 88% and 72% respectively. Providing best customer service 24/7 was also rated as a top requirement, coming in at 34%.
- Get the packaging right – make it stand out for all the right reasons. Birchbox includes a beautifully written letter in a branded box created from Birch trees.
- Persuade customers to register – if you can persuade customers to do this you can offer added benefits such as order tracking, special offers and one-click repeat purchases with saved payment details.
- Improve email customer service – this is the favoured channel for communication, standing at 44%.
- Offer useful apps/utilities – mobile apps are extremely popular, saving customers time. A recent report found that mobile/online banking ‘delights’ customers.
- Post-purchase emails – send a welcoming email and maybe some cross-sell ideas too.
- Reward your most valuable customers – look after your top customers by offering things such as priority despatch, first choice of new products and personalised shoppers in-store.
- Offer exclusive deals for social followers – maybe exclusive sales to Facebook followers; giving them reasons to keep coming back.