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Customer Lifetime Value: What It Is and How to Calculate It

What is customer lifetime value? Once you have converted a prospect and gained a customer, they will either keep buying from you whenever they need your products or services, or move on. If you only make that one sale, that’s the lifetime value of that customer. But if they return month after month or year after year, you can grow customer lifetime value, and that means a higher return on the marketing investment that gained you customers in the first place.   

Why is Customer Lifetime Value Important?

Marketing has its costs, and as such, you want to get good returns in exchange for your efforts. But are you pitching to the right audience? The Pareto Principle says that 20 percent of your efforts are responsible for 80 percent of your results. Shocking as this may seem, it’s been tested by countless businesses and it works. 

What if you could discover which 20 percent of your work brings in those higher-value customers? Armed with this knowledge, your marketing team can concentrate their efforts on activities that deliver the best results. At the same time, knowing who your best customers are helps you to align your business with their needs. They’re happier, and more likely to remain loyal. 

Calculating and monitoring customer lifetime value helps you to discover just who your best customers are; who you should be working hardest to attract and retain as clients; and helps you to find ways to get better returns from your existing customer base. Less investment, better returns: it’s an attractive prospect. 

Customer Lifetime Value Formula

What’s the average lifetime value of your customers? To get a baseline figure, gather the following data:

  • Average order value
  • Average number of transactions per period
  • Average time that customers continue to support your business

Each of these figures is already valuable on its own. For example, you could use your customer retention figure to set goals to boost customer lifetime value, look for ways to encourage customers to buy more frequently, or find strategies to boost order values. Multiplying all three figures together gives you a baseline customer lifetime value and your goal will be to keep improving it. 

However, you can do even more. What’s the demographic that represents your high value customers, for example? One of your most interesting uses for customer lifetime value is to see how it compares to customer acquisition cost. Let’s zoom in for a closer look. 

Customer Lifetime Value vs Customer Acquisition Cost

How much does it cost you to gain new customers, and is it worth it? Looking at your sales following a marketing campaign can be interesting, but what you really want are longer-term figures. So, if your marketing investments attract X number of new customers, what is your customer lifetime return on that investment? 

Knowing this fact will help you to see whether your marketing is attracting the right customers – people who genuinely gain utility from their purchases and who are likely to continue their relationships with your business. 

Tips to Increase Customer Lifetime Value

Price Increases

Looking for some extra inspirations to improve customer lifetime value? The obvious one would seem to be a price increase, but approach this with caution. Aim too high, and your prospective customers may think twice before making their purchases. 

Offer Great Customer Experiences

Keeping your customers happy, on the other hand, always improves your chance of building loyalty and getting more repeat purchases. Use customer satisfaction surveys and customer support data to benefit your customers and your business. Pay close attention to all the feedback you get. If there seem to be stumbling blocks that are preventing your customers from having an experience they unreservedly want to repeat, you just found room for improvement and a way to improve customer lifetime value. 

Pitch Higher-Priced Options and Extras

Cross-selling and upselling can help you to boost customer lifetime value, but be sure to leave customers feeling that this approach benefitted them. “Pushy” salespeople and buyers’ regret will drive your customers away and that’s just what you want to avoid. 

Build a Community

Building a customer community is a great way to help customers identify themselves with your brand and foster loyalty. Your social media activities can help a lot here – or you can consider interactive message boards – even a “club.” Consider Harley Davidson as an example. There’s a strong sense of community with fierce brand loyalty there!

Offer Value or Status Incentives

Customer incentives can make a huge difference to customer lifetime value. There are many ways to incentivise customers. It comes down to offering something they want in return for their continued loyalty. Freebies and discounts are big favourites, but you can also look beyond the obvious. For example, if leading with the latest trends is important to your customers, you can have exclusive VIP offers or give your VIPs a chance to get the latest goodies before anybody else.

Are They Getting on Board? Make it a Pleasant Ride

Onboarding processes that work for your customers will help you to provide a customer experience that incentivises repeat purchases. Make it easy, welcoming, and be sure that help is at hand whenever it’s needed. Make it hard for them, and they probably won’t be back.

Special Mention: Subscription Models

Finally, subscription models can help you to boost customer lifetime value. You’ve probably seen software subscription offers before, and they make a great example. It’s fairly standard to offer a lower monthly fee for longer subscriptions – for instance, subscribe for a year and pay less per month. 

By the end of that year, customers will have become accustomed to using that software, and as long as it still does what they need it to do, they’re very likely to renew their subscriptions. They may need a little reminder – even a call to find out if there’s a reason why they don’t seem to be renewing their contracts – or they might just leave renewals to run without you needing to intervene. 

But software isn’t the only area that’s open to subscriptions. If you’re selling something that people want or need fairly regularly, subscriptions can work with you. From wine to dog food, customers are happy to save effort and cost in return for a regular supply – and you’re happy to get repeat purchases effortlessly.

Boost Customer Lifetime Value With RSVP

There are several reasons why getting us on your side will help you to boost customer lifetime value. First and foremost, you can rely on us to give your customers great 24/7 service and support, but there’s more. Using our CRM software, we record valuable metrics that help you to “listen” to your customers even though we’re doing the listening and talking on your behalf. 

From helping you to understand customer behaviour to gathering customer satisfaction data, and following up with your customers as needed, our customer lifecycle management services provide a single, unified touchpoint that provides you with strategically important information. Meanwhile, we’re nurturing your customers by providing the superb service you want them to have. Looking for a strategic partnership to boost customer lifetime value? Let’s talk!

 

Read more about the Customer Lifecycle.

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