How To Increase Customer Lifetime Value And Boost Profit

How To Increase Customer Lifetime Value And Boost Profit

Customer lifetime value (CLV) is one of the most important performance metrics for any business. To put it simply, it is the total projected revenue a customer generates for a business throughout the lifetime. Nowadays you can increase the customer lifetime value following a number of tactics analyzing key customer metrics.

The objective of these metrics is to define the financial gain from each customer. Another version of this metric happens to be Average Profit per Customer. Whichever you decide to use, as a business owner your target is to increase the value as much as possible.

Importance of Customer Lifetime Value (CLV) For Your Business

Customer Engagement Strategies

It is not only about the money your customer is spending on your business. There is also a future value to it if you can successfully retain them as your customer for a longer period of time.

Say, for instance, you are spending $2 to attract a customer for a single product to your e-commerce site who would probably end up spending more than $200 in your store.

But now if you want to attract & acquire 100 more customers, in the same way, selling the same product to all of them then you would need $2 for each of those hundred customers raising your advertising expenditure up to $200. This has a great chance of reducing a considerable amount of profits as well as hampering your brand loyalty.

So the customer lifetime value is essentially vital for any business because the cost per acquisition is at least 5 times higher than the cost to retain existing ones. Moreover, you can improve the customer lifetime value when you know it. So make sure to take care of your existing loyal customers via email marketing, loyalty programs, SMS & social media marketing, and more. Because you want to acquire new customers without forgetting the old ones.

How Do You Determine Customer Lifetime Value (CLV)?

Customer Lifetime Value Calculation
dice with word CLV customer lifetime value on wooden background

To calculate the customer lifetime value, you need to keep track of the monetary values each customer is generating for you. This should not be a difficult process. You just need to store customer sales data in an ERP solution or spreadsheet and calculate revenue on a continuous basis. After you find out the revenues, just subtract the respective customer’s acquisition cost. It will give you that customer’s Lifetime Value.

By averaging the lifetime value of all your customers, you get a solid picture of your profitability. A high CLV usually refers that an additional customer adds more revenue to your company. When this happens, it means you can afford to spend more on customer acquisition. Ideally, that should be one of the core objectives of your business.

Tactics to Boosting Up Your Customer Lifetime Value

There are basically two ways to increase the customer lifetime value. One way is by acquiring new customers and the other way is by earning recurring revenue from past customers (also known as customer retention). The second one is the best possible way to increase customer lifetime value. A number of research findings support this statement. Here we are mentioning some of the most relatable statistics:

  • It costs five times as much to attract a new customer than to retain an existing one
  • Existing customers are 50% more likely to try your new products and spend 31% more than the new customers
  • Increasing customer retention rates by 5% results in 25%-95% increase in profits.

From this discussion, it is getting obvious that you need to focus more on customer retention to increase CLV. Now the question is how do you focus on this part? This article is mostly about that. Now we are going to talk about some techniques using which you can build strong customer loyalty and tempt them to spend more on your product! 😀

Maintain Excellent Customer Support

Unsatisfactory customer service is a major reason why people stop using a product or service. Research shows that on average a dissatisfied customer will share their negative experience with 10 other people. Furthermore, 13% of the dissatisfied customer will share it with more than 20 people.

Don’t you think it is too damaging?

Important of Customer Support

In order to increase customer lifetime value, make sure you have excellent post-sale support. Otherwise, people will quickly lose interest to use your products. You must have a system in place which will allow the customers to contact your support team smoothly. It would be a plus to have a support forum and great documentation on the website.

Change The Billing Cycle

When the customers are using your products for a long time, the average CLV is likely to increase.

So you need to think carefully about the billing cycle of your products. Is it something that the customers pay for a month or two? If yes, it will not add up to a high CLV. You should find a way to change the billing cycle to a longer one.

When you have a customer base that stays with you for at least a year, it generates predictable revenue for you. In addition to that, it gives you a better scope to earn some extra cash by upselling or cross-selling products. Therefore it is recommended that you switch to an annual billing cycle if your average customer lifetime is less than 10 months.

Create Bundled Products For Customers

This is a time-tested way to hook your customers into using your products. If you have different items for sale, group them together and offer them at a relatively lower price. A common tendency of the customers is to think that they are missing out on the other product by purchasing either of them. It lures them into buying the bundle. This way you can effectively increase the customer lifetime value.

The bundle works most effectively with related products. For example, when you go out to buy a mobile set, more than often you feel interested in an earphone or phone case. Many of us seek a set of external keyboards and mouse right after buying a laptop. These are the optimal cases for product bundling. You should think about how to make the best use of a similar case for your products.

Recommend Complementary Products To Customers

You can do it in several ways. For example, you can show a list of products at the sidebar. It will allow you to generate more interest in your products. Furthermore, you can suggest complementary products to your customers during checkout.  Products offered as cross-sell have a higher chance of getting purchased if shown during checkouts. This is a strategy that you must apply to have a higher average cart value.

Launch Limited Time Exclusive Offers Occasionally

Limited time offers to build a sense of urgency to the customers and greatly impacts their purchasing behavior. This is why Black Friday, Cyber Monday deals are so popular among them. But in order to get maximum benefit, you must use all your social channels to notify them of the offer.

Surprise & Delight Your Customers

Who doesn’t love surprises? As a part of your marketing strategy, you should take an interest in your customer’s activities and preferences. Based on that, you can design giveaway campaigns for them. It can turn out to be viral on social media and the visibility your brand will get can be enormous.

Customer research varies depending on the nature of the product. While some can be done through direct one to one phone conversation, other involves using advanced web services. You can read this piece to learn how you can give it a go.

Reward Loyal Customers More Often

Loyal customers are the ones who have the maximum impact on customer lifetime value. It is absolutely essential that from time to time you give away things that matter to them. In turn, it will help you to achieve higher brand affinity and create a community of supporters!

Let me give you an example of an excellent loyalty program. The Banana Republic credit card users can have a Luxe status after achieving a minimum spending level. It rewards them with various offers like free shipping for online orders, choose your own sale day and so on.

But Most Importantly…

After all, is said and done, you should keep in mind that these techniques will not work if you do not have a great product. So, ensuring the quality and maintaining the standard of the product should come before anything.

The customer-centric approach that we keep stressing about should be reflected in your product roadmap as well. If you can get these things right, the customer lifetime value will grow organically from the start.

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