Customer lifetime value, also known as CLV, is a major part of the stats for tracking customer experience and is integral to the customer experience program. CLV is measured based on a customer’s value to the company. It does not merely depend on purchase-by-purchase but constitutes the entire relationship.
Customer lifetime value is a customer’s total value over the entire relationship period with the business. It’s an intrinsic metric in any business that cuts down on costs, as keeping existing customers is less expensive than acquiring new ones. As a result, it increases the existing customer’s value and fuels a company’s growth. Keeping track of the CLV enables businesses to strategize customer acquisition, retain existing ones and maintain profit margins simultaneously.
It is important to note that CLV is different from Net Promoter Score or NPS, which helps measure customer loyalty, and CSAT, which helps measure customer satisfaction. It is directly linked to revenue rather than immeasurable factors such as loyalty or satisfaction.
What is the Importance of Customer Lifetime Value To A Business?
Instead of dealing with complicated calculations, businesses need to keep track of customer value during their active relationship with the brand. Once you understand what customer experience and its key touchpoints are, you will understand the main driver of CLV. It is a foolproof metric you can use if you establish a relationship with customers for more than a year. Calculating the CLV for various customers can significantly help business strategies and decisions. With CLV, you will be able to determine the following:-
- The amount you can spend for acquiring a similar customer and still earn profit
- Customers with the highest CLV demand
- Products that bring you the highest profits
- The profitable kinds of clients in your company
Together, these decisions can help boost the profitability of a business significantly.
How to Boost Customer Lifetime Value?
A business becomes more successful and profitable when it focuses on attracting and keeping long-term relationships with customers, who are likely to become advocates and returning buyers for the company. Some proven techniques guaranteed to boost the Customer Lifetime Value of a business are as follows:-
- Easy returns: Businesses must ensure seamless and hassle-free returns for customers. Making the process difficult or expensive will significantly reduce the odds of customers returning to you for another purchase.
- Set realistic delivery expectations: Ensure you do not underpromise or over-deliver when delivering your products to customers.
- Make a rewards program: A rewards system that promises desirable and attainable rewards can be an encouraging factor for repeating purchases.
- Free items: Offering freebies for purchasing is a great way to build brand loyalty.
- Make use of upsells: You can upsell a product to increase the value of a customer’s transaction on average. A great example is Burger King asking, “Would you like to add fries with your order?”
- Keep in touch: Long-time and loyal customers like it when you keep in touch because it gives them the idea that you have not forgotten about them. Ensure that it is easy for them to reach out additionally.
Contributing Factors of CLV
A customer’s perception of your brand plays a key role in defining the customer lifetime value of a company. If a customer fails to feel any kind of brand loyalty or might trigger incurring switching costs as they move to their competitor’s product, then the CLV is more likely to be negatively impacted. Therefore, before strategizing on the appropriate CLV of your business, always consider how scalable the marketing efforts and the sales are when increasing revenues. Here are a few key points to consider:-
Churn Rate: The churn rate measures how often customers discontinue doing business with a company they previously bought from. It is also known as the rate of attrition and varies for every business depending on their competitive advantage in the market. For instance, startups and new businesses usually have a bigger attrition rate than pre-existing companies.
Customer Loyalty: CLV entirely depends on the customer’s loyalty to the business. A customer without any dedication to one brand is considered a brand-agnostic. A business needs to build a feeling of brand loyalty that is directly proportional to increasing customer retention and, in turn, a decreasing churn rate. Customers loyal to the company also act as its advocate, leading word-of-mouth marketing.
Scalable Sales and Marketing: It is important to consider optimizing the marketing and sales tactics to increase a company’s revenue growth. A decrease in revenue with the increase in marketing and sales expenses will squeeze profit margins resulting in the company running at a loss. Therefore, tracking the key metrics and continuously measuring the performance is essential, leading to better strategies.
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How to Measure CLV?
Data from every possible area in a business or organization is compiled and integrated, making calculating CLV significantly easier. The best way to calculate Customer Lifetime Value is as follows:-
CLV = the average purchase value x the number of times a customer purchases in a year x the average period of a customer’s relationship with the company (in years)
CLV is usually measured by keeping the following points in mind:
- Determine the touchpoints where a customer creates value
- Integrate the records to create the journey of a customer
- Measure the revenue at every touchpoint
- Add the lifetime of said customer all together
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Other Factors That Affect CLV
CLV is also directly related to another integral metric, i.e., the CAC or Customer Acquisition Cost. The CAC is the amount invested in attracting or acquiring a new customer. Methods of CAC include marketing, advertising, special offers, and the list goes on. The Customer lifetime value can only make sense if the CAC is considered.
Cost to Serve is another factor you need to consider while measuring CLV. It is the cost that goes into conducting business with a customer. It includes every step required to get the service or the product into the hands of a customer, such as logistics, overheads, costs of contact centers, etc.
Breaking down the CLV, CAC, and the Cost to Serve from customer to customer will help determine these costs in detail. FOr instance, when the cost of serving a loyal customer increases, you might incur a loss despite their high CLV. Unlike customer acquisition, the cost to serve also varies pertaining to the customer’s lifetime. Reading, deciphering, and tracking these numbers over time is fundamental to gaining a deep understanding of the driving force that leads customers to spend.
- A 5% increase in customer retention will produce a 25% profit increase.
- Getting a new customer is 5 to 25 times pricier than retaining a loyal customer.
- The probability of gaining a loyal customer is between 60%-70%.
- Loyal customers tend to spend 67% more than newer customers on average.
- 76% of businesses and companies consider CLV integral to their organization.
A business is bound to lose and gain many customers over its lifetime, while a truly good product or a service is bound to keep customers satisfied. This is what adds to the CLV of a company during the period of their customer relationship. If you want to learn more about Customer Lifetime Value, you can sign up for a premium MBA course from upGrad to take your career a step further.
What are the factors that affect the CLV in a company?
Based on the theory of relationship marketing, the primary factors that significantly affect Customer Lifetime Value are:- Functional quality, Technical quality, Brand credibility, Special treatment benefits, Confidence benefits, Commitment, and Customer satisfaction.
What's an example of a good customer lifetime value?
In general, the Customer Lifetime Value of a company is considered good if it is at least three times greater than the Customer Acquisition Cost of the company. For instance, if a company spends $200 on marketing and advertisement to acquire a new customer, that customer must have an LTV of $600 minimum.
What are the three constituents of Customer Lifetime Value?
To measure Customer Lifetime Value, you need to consider three parameters:- Constant margin per period, Constant retention probability per period, and Discount rate.