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Shaping your marketing strategy to continually reach your target audience and improve customer retention is a difficult task. With the help of customer lifetime value, you can better understand how to shift customer support and experience to meet these goals.
What is customer lifetime value? How do you calculate it? And how can you alter your customer experience to better increase customer lifetime value? Keep reading to find the answers!
What is customer lifetime value?
There are different metrics to gauge customer experience (CX) using a net promoter score (NPS), customer satisfaction score (CSAT), or customer effort score (CES), but the best key performance indicator that measures how efficient your CX strategy is is by calculating customer lifetime value (CLV). CLV measures how much a business can plan to earn from the average customer throughout the relationship. It is indicative of what is working well and what isn’t working well for your organization in terms of marketing and loyalty.
Simply, customer lifetime value is the total amount of money a customer is expected to spend with your business, or on your products, during the lifetime of an average business relationship. A successful CX strategy depends on your capacity to comprehend and utilize CLV. Marketers have historically used CLV to segment customers, customize engagement strategies, and allocate funds. Now that you know what customer lifetime value is, let’s run through how you can calculate it.
How to calculate CLV
There are a few different ways to calculate customer lifetime value. Something to take note of is that marketing expenses can be added to calculations but are often left out because they fluctuate consistently. Use the simple formula or the traditional formula below to calculate CLV.
The simple formula is the most basic way to calculate CLV. Add up the revenue earned from a customer multiplied by the average customer lifespan and subtract the initial cost of acquiring them. Let’s look at an example.
Annual revenue per customer X average number of years they remained as a customer - the initial cost of acquiring them = CLV
A SaaS company generates $5,000 per customer each year with an average customer lifetime of 10 years and a customer acquisition cost of $3,000 for each customer. They would calculate CLV like this:
$5,000 X 10 - $3,000 = $47,000
On the other end, the traditional formula is a detailed equation that accounts for discounts and breaks down individual costs and profits each year. This equation is required if your annual sales per customer aren’t flat and shows how CLV can alter over time. Gather this information:
- Average gross margin per customer lifespan
- Customer retention rate
- Rate of discount
Gross margin X (Retention rate / (1 + rate of discount - retention rate) = CLV
In action, this CLV could be calculated by the following: if your company’s gross margin is $2,200, retention rate is 70% and discount rate is 10%, you would write that as…
$2,200 X (.70 / (1 + 0.1 - 0.7) = CLV
Add one to the rate of discount and subtract the retention rate to get 0.4
Then divide retention rate by 0.4 to get 1.75
We can then multiply 1.75 by the gross margin of $2,200
CLV = $3,850
The traditional CLV formula is used to better factor in changes year on year.
Why is CLV important for businesses?
Knowing what you can expect to earn from a typical customer allows you to adjust spending to boost or decrease profitability so you can continue reaching your target audience. According to Bain & Company…
Businesses can grow revenues between 4% and 8% above their market when prioritizing better customer service experiences.
Once you begin calculating CLV, you can use it to create specialized customer experience tactics for pricing, sales, advertising, and retention. It also allows you to plan and forecast. The benefits of calculating CLV include:
- Improve customer retention
- Drive repeat sales
- Encourage higher-value sales
- Increase profitability
By understanding CLV it means that you can maximize the value of every customer relationship and create an overall better experience for customers that makes them loyal to your business. So how can you use customer experience to improve your customer lifetime value?
How to leverage CX to improve CLV
1. Provide high-quality customer service
Quality customer support is a necessary investment for business growth. According to Glance…
78% of customers have backed out of a purchase due to a poor customer experience.
Offering the very best customer support sets you up for success to improve customer lifetime value. If customers know that they can come to your support team with questions or problems and receive a timely solution, it reassures them that you care about their happiness and that they can get the help they need without the hassle.
Depending on your business, you may require different types of support. Here are a few to consider:
Omnichannel support is valuable because it allows customers to reach out using their preferred method of communication. Whatever channel your customers use the most is the first place you should start.
24/7 support is amazing for customers who need or desire a round-the-clock solution. Offering convenient, 24/7 support helps to meet customer expectations. Knowing that they can reach out at any time increases loyalty and reputation.
Live chat support is your answer for customers who need an immediate solution. With live chat, you give customers a way to reach you at the exact moment they have questions or problems.
Voice support drives satisfaction by being able to phone in and speak to a representative. With voice support, customers can make a quick call if something is frustrating them and they have not been able to find a solution for themselves.
2. Create a loyalty program
Loyalty programs increase CLV in different ways. The first is that they encourage customers to purchase more. Loyalty programs also increase how often customers buy, and when they do they feel incentivized to continue doing so because there is a reward. According to Nielsen…
As many as 84% of consumers say they’re more apt to stick with a brand that offers a loyalty program.
An innovative loyalty program can include anything from points-based rewards, tiered programs, paid loyalty programs, or value-based rewards. Consider a loyalty program to reap the benefits of additional customer referrals, higher retention, more sales, and brand advocacy.
3. Upselling and cross-selling
These two, straightforward techniques raise the amount of money your consumers spend with your company and increase your CLV. The thing with upselling and cross-selling is that it can benefit your customers and can come from a place of recommending additional products or services that customers can gain value from.
Identify customers with a real need and show them the usefulness of upgrading or adding on to their order. Then, by providing a transparent pricing breakdown, customers can see where their money is going for the quality they are receiving.
4. Keep customers engaged with value-packed content
Continuously offering new and exciting content keeps customers engaged with your brand. This can be done in a myriad of ways such as blogs, email campaigns, or social media, and also serves to acquire new customers.
Consider Duolingo for example. Their social media is fun and engaging while simultaneously reminding you to practice your Spanish lesson for the day. Using your brand and voice, publish content that entertains and inspires.
5. Provide targeted and personalized campaigns
Taking the time to segment your audience and create customized campaigns is a recommended way to make the most of your marketing strategy. When customers receive an email campaign that is highly personalized with products and messages that relate to them, it keeps them from tuning out and inspires them to purchase.
Overall, a customer-centric approach is always the most rewarding for your business and customers. With attention and care given to customer experience, it will continue to increase your customer lifetime value for higher profits and longer retention from satisfied consumers who enjoy supporting your business.
Invest in customer support to increase CLV
Customer support is the most important thing a company can invest in. Our teams work on demand to provide 24/7 customer support with all management and training included. Ready to launch in one week, Influx teams can provide the CX support you need to get back to what you love most. Get support today!
