Customer lifetime value (cLTV) is a measure that indicates what a business can plan to earn from a customer over the entire course of their relationship. It is not an easy task to calculate cLTV taking into consideration the fact that there could be differences in costs, the product, purchase volumes and frequencies during this time. However, there are tools available today that can make this calculation as easy as a breeze.
The metric is useful in that it allows the business to make better-informed decisions about marketing the product or the service during the course. Therefore, the business owner and the sales managers need to understand how this metric works and how it is calculated.
How to calculate cLTV?
There are 4 steps involved in measuring the cLTV. They are:
Step 1: Determining the Average Order Value
You can start by determining the value of the average sale. The best way to calculate this is to look at a representative 1-month or 3-month purchase period of the customer as representative for a complete one year.
Step 2: Calculate the average number of transactions/period
This is a number indicative of the number of times a customer transacts with the business over a specific period. This could be different for different businesses. As an example, while it may be a high number for a coffee shop, this number is a small one for a car dealership. The frequency of visits is a major driver to calculate cLTV.
Step 3: Measure customer retention
You will now determine for how long the specific customer sticks with your brand. Whereas some brands inspire customers to hang on with them for an entire lifetime (car dealerships), others have customers with very little loyalty (retail chains).
Step 4: Calculate cLTV
The cLTV is a product of the three values obtained. That is:
Each of the factors can now be improved to grow your cLTV.
Why cLTV is important?
If you own a business, there are a few vital reasons why you could track and measure cLTV. While you can improve only what you measure, calculation of cLTV can help you forecast your business better and also allow you to make better decisions as far as your customer acquisition costs are concerned. Other marked advantages are:
1. It can help to retain more customers
This is one of the best ways by which you can cut down customer attrition. Tracking these metrics helps you identify your best customers and keep them there by finding out what works well.
2. It can improve customer loyalty
Tracking cLTV over a year or customer lifetimes can help you to work on methods/strategies that will urge the customer to repeatedly purchase from you.
3. It can help to improve sales
Improving cLTV by increasing the prices is a take that has to be executed carefully. Increasing the costs too quickly may not bring in the desired results. You should do this in a balanced fashion.
4. It can lead to higher ROI
Retaining customers for a longer period by using mindful strategies to build a business that encourages your customers to shop more with you should bring you a better ROI in less time.
Different Strategies to Increase cLTV
There are different methods you can adopt to improve cLTV. For quick reference, a few of them are given below.
1. Make personalized offers to segmented customers
It is vital to segment your customers to find out who the most valuable ones are. You can segment your customers based on engagement levels, sign-up source, demographics (age, gender, and location), product interest (category) and purchase history (loyalty). Once you have segmented your customers, it pays to personalize emails and any information that you share with your customer. Statistics reveal that personalization can increase customer satisfaction by up to 20% and sales conversion by up to 15%. In the longer term, a reduction in marketing costs is also observed.
2. Offer better customer service for better cLTV
Better customer service means a better customer experience. For this, it is important to be active on multiple social media, so that the customers find it easy to contact customer care or support via these channels.
After taking a look at how your customers are using your social media handles and how much active they are on specific social media, you can accordingly allocate resources to serve your customers. As the customers of today demand faster responses for their queries, it is a good idea to go for 24/7 support from your side.
3. Create a loyalty program
It is important to reward your most loyal customers. Business performance only tells you whether your customers are happy or not. However, to measure their satisfaction, it is vital to collect their feedback regularly using surveys. This would surely make them an important part of your business growth. They will appreciate your effort and try to stay loyal to your brand.
Running loyalty programs in the form of discounts and rewards (loyalty points, loyalty cards, apps, refer a friend, etc.) for regular buyers usually works.
4. Start a subscription pricing model
It is a good idea to lock in people for loner terms so that they end up buying from you. This is a guarantee that revenue will flow in while simultaneously making sure that your product becomes a staple-use item. This helps to increase brand loyalty. You can offer a range of benefits for people who sign up for longer subscriptions to your product/service. This is a wonderful way of increasing cLTV.
5. Push higher order value products
Cross-selling and upselling are two attractive propositions that you can use to increase cLTV. Offering better solutions to your customers can help to increase the average order value and thus the cLTV over a period.
Either showing your customer a complementary product/service or presenting them an option that is priced higher and having more benefits is a great way to increase cLTV. Using contextual ads for your customers is perhaps the best way to get them to know about offers.
Retargeting is about wooing customers who have visited your site but never became your customer. Retargeting works by using cookies or data that remember who visited your website.
You can then send these customers targeted ads reminding them of the things they wanted to buy. This could get you a new customer who turns out to be most loyal and help to increase your cLTV.
7. Drip Marketing
Drip marketing involves sending a fixed number of emails automatically to a person within a set time, based on their actions. As an example, drip marketing may be started if the person places an order, empties the shopping cart, attends a store event, etc.
Giving them access to special offers before making them available to the general public, keeping them informed about new product releases, etc., may just get them to pick up a product/service from you and go on to become a loyal customer. This will help to improve your cLTV.
8. First-party data leverage
Tracking data of all the visitors to your website is possible when you provide more value for the visiting customer and communicate the reason for collecting the data. First-party data enables building trust and favours customer retention. Both these factors together help to increase the cLTV.
9. Smooth onboarding process
cLTV being the ultimate business metric that you can improve, your business has to retain customers and maximize the ROI. In this exercise, onboarding a customer is among the most important activities that contribute to customer retention. This is the first step for a new customer (not a prospect anymore) and, if done correctly (opt-in email, welcome email, aid+advice email, action+incentive email, etc., in that order), gets you a new loyal customer.
If you value your customers, your business will surely grow. Offering them what they need, asking them for feedback about the business and promptly acting on it, and providing extended support including personalized customer experience will all help you to increase the value of the cLTV metric.