Customer lifetime value is one of the most important metrics for eCommerce. It shows how the company is doing financially and how long it will be able to stay in business.
Do you know how to figure out the value of a customer over their lifetime and how to plan to increase it? Check out this guide with me!
What is the lifetime value of a customer?
Customer Lifetime Value (CLV) is the amount of money a customer is likely to bring in over the course of their time as a paying customer. For example, if a customer signed up for one of your products on a one-year plan, they would be your customer for one year. Your expected annual income will be how much they are worth over their whole lives.
So, your CLV will go up as customers stay with you longer and buy more from you. Let’s say you can figure out the types of customers who bring in the most CLV. In that case, you could use those profiles to find new clients who are like your best customers.
Customer Lifetime Value is important because…
Here are some of the reasons why it’s important to know your CLV:
Over time, it can bring in more money:
The longer a customer stays with a company or the more value they add to it, the more money the company makes. So, keeping an eye on and improving CLV brings in more money.
CLV helps you figure out which clients bring in the most money for your business. This lets you give these customers the products and services they like, which makes them happier and makes them more likely to spend more money with your business.
It can help solve problems to keep clients and make them more loyal:
If your company makes it a priority to review CLV, it will be easier to spot any worrying trends and come up with a plan to fix them. For example, if the CLV is always low, you might try to improve your customer service plan or loyalty program. This will help you give better customer service.
It lets you concentrate on your possible clients:
You can guess how much a customer will spend with you over time if you know their lifetime value, whether it’s $10, $100, or $1,000. With this kind of information, you can make a plan to bring in customers who will spend the most money with your business.
Increasing CLV can bring down the cost of getting a new customer:
Getting new clients might cost a lot of money. Most of the time, it costs more to get a new customer than to keep an old one. A higher retention rate could also lead to more money in the bank. So, your business needs to know who its most valuable customers are and treat them well. Benefits include longer customer relationships, bigger profit margins, and lower costs to get new customers.
How to Figure Out the Value of a Customer Over Time
You can figure out CLV with a few different formulas. Your choice will depend on the information you have. But pick one and stick to it. First, we’ll give you the easiest and most common choice. When you measure CLV, you must think about the following:
- Clients’ lifetime
- Rate of keeping things
- Rate of client turnover
- The average amount of money made per customer
Lifetime value of a customer in the past
Sometimes a more traditional, but still detailed, CLV formula works better. This is the case when your sales don’t stay the same from year to year. Also important to think about are the discount rate, the average gross margin per client’s lifetime, and the rate of customer retention.
Here’s how your finished formula will look:
This equation looks at how client income might change over time. Then, each year, a discount rate is used to take inflation into account.
Customer Lifetime Value in the Past
Historical CLV is the total gross profit from all the purchases a customer has made in the past. To find it, you must add up all of the client’s gross profits up to the Nth transaction. Calculate CLV based on the net profit to find out how much real money a certain client brings in. This includes things like service costs, return fees, marketing costs, acquisition costs, and so on.
Remember that all current and past customers are added together to get the historical CLV. They might act and like things differently, which could be hard. Changes in customers can have an effect on CLV.
Customer Lifetime Value (CLTV)
The goal of predictive CLV is to build a model of your customers’ transactional behavior to predict what they will do next. It’s a much better indicator of CLV than CLV in the past.
The predictive model uses algorithms to accurately predict the total value of a customer while coming up with a CLV. It works based on past transactions and how clients have behaved.
Again, you can choose from a number of CLV formulas. So that everything is clear, we’ll use a simple example.
Here’s how it works:
This is a predictive method, so keep in mind that it won’t always be right. To get more accurate results, you should change the CLV calculations to fit your business sector. When your CLV is accurate, you have a tool that can help you make a good marketing plan.
Strategies can be used to increase customer lifetime value.
There are many ways for companies to increase their CLV. If you want to make more money from regular customers, you might want to try these things:
Make loyalty or rewards programs for your customers.
Customer loyalty programs keep customers interested and get them to buy more than once. Frequent flyer programs and punch cards from restaurants are two popular examples. Encouragement of repeat business can increase the number of times a customer buys from a brand and the length of time they buy from that brand.
Optimize Customer Experience
The customer experience includes your website, your physical store, your call center, and any other point of contact with your business. Customers are more likely to come back if they always have a good, stress-free shopping experience.
Make it easy for people to buy things.
Online stores use the “cart abandonment rate” to figure out how many people start shopping but then leave before completing the checkout process. This is also true for shopping in person, where too many choices and too much packaging might turn people away. By making it easy to buy things, you’ll be able to make every transaction possible. A/B testing is one way that forward-thinking companies figure out which solutions work best.
Make it easy to send in returns
If you make it hard for customers who are unhappy with your products or services to return or exchange them, you might lose that customer forever. If the return process is easy, a customer is more likely to use your products or services again.
Make specific content.
Content marketing is a way to teach or entertain the people you want to reach. It is often made to make people trust and stay loyal to a brand. Blog posts, podcasts, e-books, videos, and other media are common types of tailored content that can reach specific groups of people.
Keep Customer Engagement
Businesses that carefully keep track of every interaction with a customer can find ways to improve customer loyalty and satisfaction. This should be true for all channels, like advertising, sales, and customer service.
Improve how you welcome customers
Some customers buy something from a business but don’t know what to do next. Over time, companies that do well make plans for how to connect with their customers. For many businesses to grow, they need to turn one-time customers into customers who buy from them again and again.
Help your customers more.
Customers may quickly switch to competitors if they don’t get good customer service, which will cause your CLV to drop. Customer loyalty will go up even more if you do everything you can to make sure every customer service interaction goes well. Using CRM and customer service platforms makes it easier to keep track of these interactions.
Pay attention to the feedback loop from customers.
If a client has a bad experience, it should be fixed as soon as possible. In addition to relying on customer service to solve problems, businesses should always ask their customers for feedback on how they can improve their service. Customers are more likely to be happy with a product or service if problems are fixed on a regular basis.
Take care of your customers
In sales, customer service, and marketing, businesses must know how they interact with customers and what they have said to them in the past. ERP and CRM systems help track and improve these connections over time by making sure information flows smoothly through the entire customer lifecycle, from lead to opportunity, sales order, fulfillment, renewal, upsell, and support.
Spend money on software and technology.
With technology, you can automate some tasks and track and store a lot of your business data in one place. Some businesses manage this information with simple tools like email, contact databases, and spreadsheets, but it’s much easier to use software packages that have already been tested and are ready to go. Your clients will be able to tell the difference.
Cross-sell and upsell
Sometimes it’s easier to re-engage or upsell an old client than to find a new one. Upselling and cross-selling are ways to get customers to buy more expensive products or services at once instead of a cheaper one.
Prices should go up.
When done right, a price increase can raise CLV right away. Just make sure that sudden price hikes don’t scare away your clients. When choosing your own, you should also think about how much the other ones cost. You can raise prices without losing customers by putting the focus on value and giving customers something they can’t get anywhere else.
Utilize Social Media
One of the best ways to get the attention of consumers is to talk to them where they already hang out. Sites like Facebook, TikTok, Instagram, and Twitter are good places to advertise and interact with customers.
Successful subscription businesses keep track of the lifetime value of their customers and work hard to raise it. CLV can help businesses improve their marketing and customer management strategies so they can make more money and keep more customers.
There are a number of ways to figure out CLV and increase it. You may choose the best strategy based on the type of business you have. On dropship-empire Blog, you can learn more useful business terms and ways to do things.