What is Customer Lifetime Value (CLV)?

Customer lifetime value is the total income a business can expect from a customer over the entire period of their relationship.

It’s an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.

Keeping customers loyal makes good economic sense. Loyal customers spend more and stay around longer. Research also shows that it’s five times cheaper to keep an old customer than acquire a new one. Conversely, customer defections can be costly.

What is Customer Lifetime Value or CLV?

Customer lifetime value (CLV, or CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.

Here are some other reasons why understanding your CLV is essential.

1. Increasing CLV can increase revenue over time.

The longer the lifecycle or the more value a customer brings during that lifecycle, the more revenue a business earns.

Therefore, tracking and improving CLV results in more revenue.

CLV helps you identify the specific customers that contribute the most revenue to your business.

You can use this information to tailor your offerings to your highest spenders and keep them coming back for more.

2. It can help you identify issues so you can boost customer loyalty and retention.

If you review CLV as a priority in your business, you can identify any worrying trends and come up with action items to address them.

For example, if you find the CLV to be consistently low, you can work to optimize your customer support strategy or loyalty program to better meet the needs of your customers.

3. It helps you target your ideal customers.

When you know the lifetime value of a customer, you also know how much money they spend with your business over some time.

Armed with that knowledge, you can develop a customer acquisition strategy that targets customers who will spend the most at your business.

4. Increasing CLV can help reduce customer acquisition costs.

Acquiring new customers can be costly.

As noted by a recent article from The European Business Review, the acquisition is typically five times more expensive than retention.

This shows that it’s essential that your business identifies and nurtures the most valuable customers that interact with your company.

By doing so, you’ll have higher profit margins, increased customer lifetime values, and reduced customer acquisition costs.

Now that we understand the importance of customer lifetime value, let’s talk about the two main customer lifetime value models.

How to improve Customer Lifetime Value

Customer lifetime value is all about forming a lasting positive connection with your customers.

So it naturally follows that the way to boost your CLV figures is to nurture those customer relationships.

Here are a few ways of doing that.

Invest in customer experience

Customer experience is made up of every instance of connection between a customer and a brand, including store visits, contact center queries, purchases, product use, and even their exposure to advertising and social media.

Improving the experience is a business-wide endeavor that’s often addressed using a customer experience management program.

This is a process of monitoring, listening, and making changes that add up to a lasting improvement in how customers feel and their tendency to be loyal over the long term.

Ensure your onboarding process is seamless

Customer experience starts the moment a potential customer encounters your brand, but often companies can forget that customers need care after the purchase.

Make sure your onboarding process is optimized for your customers’ needs, and it’s as simple and easy as possible for minimal customer effort.

Personalization and communicating the extra value you provide to your customers should be a priority.

Start a loyalty program

A loyalty program incentivizes repeat business by offering discounts or benefits in return. It might take the form of a loyalty card or app or a points system that customers accrue when they make a purchase.

Although it’s not a silver bullet for customer retention, a loyalty program can yield great results when it’s planned and executed well.

Recognize and reward your best customers

With your customer experience management program up and running, you’ll already have some ideas about which customers are likely to have the best CLV.

You can nurture your relationships with these individuals or groups using targeted marketing and special offers that recognize their loyalty.

This could include free expedited shipping, top-tier benefits in your loyalty program, or access to exclusive or pre-release products and services.

Provide omnichannel support

Your customers will have a variety of preferences for how they engage with you, so your support channels need to reflect this.

Do your research to find out which channels your particular customer base prefers, rather than just offering what you think they’ll want to use.

 Get customer feedback on self-service options and frontline interactions to provide a great customer experience with omnichannel support.

Remember the power of social media

Social media is increasingly important not only for customer communication but for customers to gather information on your brand and public image.

If customers feel as though your social media responses to a query or issue aren’t fast enough, thorough enough, or empathetic, this will affect the opinion the customer has of your brand moving forward.

Make sure you factor in social media – mentions, and responses into your customer experience strategy.

Close the loop with unhappy customers

Closed-loop feedback is a powerful way to reduce unwanted churn and turn dissatisfied customers into newly loyal ones.

In this model, businesses proactively reach out to detractors or complainants and intervene before issues can escalate and lead to a breakdown of the customer relationship.

In many cases, this targeted effort and active listening on the part of the business actually makes the relationship stronger than it was originally. It’s a valuable extension of your customer experience management program.

Conclusion

The first four steps in the marketing process involve engaging customers and building customer relationships by creating and delivering superior customer value.

The final step involves capturing value in return in the form of sales, market share, advocacy, and profits. By creating superior customer value, the firm creates satisfied customers who stay loyal, buy more, and advocate the brand to others.

Good customer relationship management creates customer satisfaction. In turn, satisfied customers remain loyal and talk favorably to others about the company and its products.

Losing a customer means losing more than a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage. 

So be careful. 

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