It costs less to keep a customer than to find a new one. Therefore, you want to make sure that your customers are happy with your product or service so that they will stay with you long enough to make back the money you spent to earn their business.
You don’t want customers to churn so that you have to keep looking for new business. A good way to reduce this is to measure customer lifetime value (CLTV). This will help your business get and keep customers who are very valuable, and this will bring in more money over time.
What is Customer Lifetime Value (CLV)?
CLV is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.
The metric takes into account a customer’s revenue value and compares it to the company’s predicted customer lifespan.
As a customer continues to purchase items from a company, their lifetime value to the company increases.
This metric is something that customer support and success teams can directly influence during the customer’s journey. customer support reps and customer success managers play important roles in solving customer problems and offering recommendations that increase customer loyalty and reduce churn.
This information can be used to help make business decisions. For example, you can use customer lifetime value to identify customer segments that are most valuable to the company and target them for special deals or offers.
Why is Customer Lifetime Value Important?
Here are some reasons why understanding your CLV is essential:
Increasing CLV can increase revenue over time.
The amount of revenue a business earns is directly proportional to the amount of value a customer brings during their lifetime with the company. Therefore, by tracking and improving Customer Lifetime Value, businesses can increase their total revenue.
CLV allows you to see which of your customers contribute the most revenue to your business. This way, you can serve these customers with products and services they like, making them happier and more likely to spend more money with your company.
Growing companies are more likely to invest in customer service programs because they realize how important it is to keep their customers happy.
Stagnant or declining companies are less likely to prioritize customer success, while companies that are actively trying to improve customer satisfaction see more revenue growth.
It can help you identify issues so you can boost customer loyalty and retention.
If you prioritize reviewing your customer lifetime value, you can identify any worrying trends and come up with strategies to address them.
If the CLV is low, it could mean that the customer support strategy or loyalty program is not meeting the needs of customers. To improve the CLV, work to optimize the customer support strategy or loyalty program.
It helps you target your ideal customers.
Knowing the lifetime value of a customer allows you to understand how much money they will spend with your business over time. This knowledge can help you create a customer acquisition strategy that focuses on attracting customers who are likely to spend a lot of money with your company.
Increasing CLV can help reduce customer acquisition costs.
It costs five times more to acquire a new customer than to keep a current one.
An additional study conducted by Bain & Company found that a 5% increase in retention rate can lead to a rise between 25% to 95%.
The following statistics demonstrate the importance of identifying and developing relationships with the most valuable customers for your business. This will lead to higher profit margins, increased customer lifetime values, and reduced customer acquisition costs.
Now that we understand the importance of customer lifetime value, let’s learn how to calculate it.
How to Calculate Customer LTV
Customer Lifetime Value is determined by multiplying a customer’s average value by their average lifespan. To calculate a customer’s average value, you need to find the average amount they spend per purchase, and then multiply that by the average number of purchases they make. To calculate the average customer lifespan, you need to multiply the customer value by the average number of years a customer remains active.
We will examine both the parts of this equation (and how to figure out each one) below.
– (Customer Churn * Average Customer Lifespan) The customer lifetime value is the total amount of money a customer is expected to spend minus the amount of money lost due to customer churn.
per Customer Customer value can be determined by multiplying the average purchase value by the average number of purchases per customer.
Customer Lifetime Value Model
There are two models that companies can use to measure customer lifetime value. The model a company chooses can result in different outcomes, based on whether the company is looking at pre-existing data or trying to determine future customer behavior based on current circumstances.
Predictive Customer Lifetime Value
The predictive customer lifetime value model uses regression or machine learning to predict the buying behavior of existing and new customers.
The predictive model for customer lifetime value can help you to identify your most valuable customers, the products or services which generate the most revenue, and how you can improve customer retention.
Historical Customer Lifetime Value
The historical model uses past data to predict the value of a customer. It does not consider whether the existing customer will continue with the company or not. With the historical model, the average order value is used to determine the value of your customers.
This model is not perfect because it does not take into account that every customer’s journey is different. If a customer who is deemed valuable by the model becomes inactive, it could throw off the data. Similarly, a customer who is inactive might start buying from you again, but you might not notice because they have been labeled as inactive.
This text discusses the different metrics needed to calculate customer lifetime value and why they’re important. The metrics mentioned are customer acquisition costs, customer retention rates, customer churn rates, customer profitability, and customer lifetime value. Customer acquisition costs are important because they show how much it costs to bring in a new customer. Customer retention rates are important because they show how likely a customer is to keep coming back. Customer churn rates are important because they show how many customers are leaving. Customer profitability is important because it shows how much money a customer is worth to the company. Customer lifetime value is important because it shows how much money a customer will spend with the company over their lifetime.
Customer Lifetime Value Formulas
Lifetime value calculation provides businesses with data-driven insights into what existing customers find valuable about your business, which can improve customer retention and gauge financial viability.
As we look at the most common CLV formulas, we can see what variables contribute to each one and how that can help your business.
How to Increase Your Customer Lifetime Value
Even if you’re happy with your current results, there are always ways to improve! Here are some tips for getting the most out of every customer relationship by creating new opportunities to increase their value.
Start a loyalty program
An overwhelming majority of companies have customer loyalty programs, which are also one of the most effective ways to increase revenue and retain customers. The research shows that the great majority of consumers would stick with a brand that offers a loyalty program, and that a significant number of them say earning rewards influences their spending behavior.
Use a loyalty program to show your most dedicated customers that you care by offering them gifts and rewards for repeat purchases. You can offer different perks to encourage upsells and cross-sells like:
- Gift cards
- Free swag
Customers can use the points they’ve earned to redeem certain products. A body care retailer called Blume used a point system called Blume Bucks (BBs) for its loyalty program, Blumetopia. Customers earned BBs by completing tasks like following the brand on Instagram, buying products, leaving a review, or having a birthday. Customers could use the points they’ve earned to redeem certain products.
Customers can join for free, and redeem their BBs for free products, merch, and other gifts from Blume.
With an app like Smile, you can easily set up a loyalty program that gives your customers access to exclusive perks and discounts, referral and VIP programs, and other fun ways to engage with your brand.
Invest in customer experience
Brands had to change their approach to customer experience because of the pandemic. eCommerce businesses responded by making it easier to shop online and providing emotionally pleasing experiences.
The XM Institute’s most recent data shows that 95% of consumers who rate a company’s customer experience as “very good” are also likely to recommend that company to others.
Some easy ways you can improve customer experience include:
- Being open to customer feedback and using that information to improve the experience
- Removing high-effort tasks like slow customer support and payments processing
- Thanking your customers by sending thank you notes, special gifts, and unexpected deals
- Creating a memorable unboxing experience that intrigues and delights customers
- Providing fast and easy support (Once a customer contacts you for help, the clock is ticking.)
- Measuring success and adapting (Use Net Promoter Score or customer satisfaction surveys to track customer sentiment. Higher scores mean your customer experience is good, while lower suggests your CX strategy isn’t working.)
You need to be consistently nurturing and caring to have a positive impact on your customers and realize higher sales and CLV.
Offer easy returns
There is no way to avoid returns and refunds when operating an online business. In 2020, consumers returned nearly $428 billion worth of products, equaling just over 10% of total retail sales. Data suggests that 20% of online-bought products are returned, so you need to find a happy medium.
If you provide a good experience to customers, 92% of them will come back to make another purchase.
An app like Returnly is a great way to improve your returns experience. It integrates directly with your Shopify orders and offers self-service returns for customers.
The text states that you can control various aspects of the returns process, including the policy and branding. The Green Returns program helps you reduce waste by determining if an item can be resold if it is returned, based on your policy. This can lead to cheaper shipping costs and happier customers.
Upsell and cross-sell
Upselling involves convincing customers to buy a more expensive or upgraded version of a product they have already purchased. This tactic is used to increase the size of a sale, rather than to make a new sale.
Upsells work to increase CLV for two reasons:
- The probability of selling to an existing customer is 60% to 70%, compared to a 5% to 20% chance of selling to a new one.
- It increases average order value, which contributes to higher customer lifetime value.
Cross-selling is often confused with upselling, but the key difference is that cross-selling involves a recommendation that complements the original product, while upselling is an upgraded version. So, while upselling is like a server asking “Would you like Hendrick’s instead of well gin?”, cross-selling is more like them asking “Would you like fries with that?”
ReConvert is an app that you can use to add upsell and cross-selling tactics to your store. It provides post-purchase funnels and one-click upsell pages that you can design in minutes. You can also use it to display product recommendations, offer coupon codes, collect birthdays, and more.
Provide amazing customer service
Customer service is important because it helps customers when something goes wrong. Support is an area of business that is often associated with slow response times and inefficiency, but it is important to have good customer service if you want to keep customers and encourage sales.
According to a US survey, 36% of respondents said that “great customer service” is a motivation to recommend a brand online. In addition, 60% of Internet users hesitate to buy something online because of bad customer service.
What channels do your customers prefer for support? Find out if they like self-service, social media, or website live chat. Then you can invest in those channels and provide better support.
The Shopify Inbox app helps retailers provide omnichannel support for customers, allowing them to communicate and sell products via chat, social media, and email, all from within the app. The app also allows retailers to send products, discounts, and new orders from their Shopify store directly to customers via chat, with just a few taps, in order to increase conversions.
Shopify Inbox can be integrated with popular messaging platforms such as Facebook Messenger, so customers can contact you directly from your Facebook page, Facebook shop, and Messenger.
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