Learn how you can Unlock Limitless Customer Lifetime Value with CleverTap’s All-in-One Customer Engagement Platform.
What drives customer retention and loyalty?
In the dynamic landscape of business, customer relationships are constantly evolving. While customer acquisition and loss are inevitable, exceptional products or services have the power to cultivate lasting connections. This continual hunger for more is what sustains and enhances the value of the company-customer relationship over time. Explore our guide to calculating customer lifetime value, or dive into our infographic for a visual breakdown.
Customer Lifetime Value (CLV), also known as Lifetime Value (LTV), encapsulates the total anticipated profit a company foresees from its average customer throughout their entire relationship. This metric isn’t just about one-off transactions; it considers various factors such as customer acquisition costs (CAC), ongoing sales and marketing expenses, operational costs, and production expenses.
While many businesses focus solely on immediate sales, a myopic approach that neglects the potential long-term value of each customer, optimizing CLV is crucial for sustainable growth. While acquiring new customers is necessary for expansion, nurturing existing customer relationships and maximizing their lifetime value is equally—if not more—important for maintaining a thriving business model.
Research indicates that even a modest 5% increase in customer retention rates can yield substantial profit boosts ranging from 25% to a staggering 95%. With this profound impact in mind, prioritizing efforts to enhance expected customer lifetime value becomes imperative for businesses aiming for sustained success and profitability.
Customer Lifetime Value (CLV) relies on informed assumptions, such as estimating average sale value, transaction frequency, and customer relationship duration. Established businesses with historical data can calculate CLV more accurately.
Here’s how to calculate customer lifetime value:
Customer Lifetime Value = Customer Value × Average Customer Lifespan
It’s basically the customer value (which is the average value of a sale x the average number of transactions) multiplied by the average customer lifespan.
If you’re looking for a simple way to calculate CLTV for yourself, try our Customer Lifetime Value Calculator.
To give you a concrete customer lifetime value example, let’s create a hypothetical company to calculate the lifetime value of a customer.
The average sale for the boutique clothing retailer, Bellissi, is $50, and the average customer shops with them three times per year for two years. The customer lifetime value of this customer is calculated as follows:
Customer Value = (avg. value of a sale) x ( ave. number of transactions)
= $50 × 3
= $150
Customer Lifetime Value = (customer value) x (avg. customer lifespan)
= $150 x 2
= $300
When considering what weighs on the customer lifetime value we must consider how the customer perceives the brand in question.
If a customer does not feel any brand loyalty or incur switching costs when transitioning their business to a competitor’s product, then it’s likely that CLV will be impacted negatively. We must also consider how scalable the sales and marketing efforts are when growing revenues and increasing customer lifetime value. Consider the following:
How often do customers stop shopping with a business they’ve previously patronized? The rate of attrition, or churn rate, differs from business to business, depending on the competitive advantage a business can command. Startups, for example, experience a much larger attrition rate than a given industry’s entrenched incumbents.
Churn rate is calculated by:
For example, if a business started the year with 1,000 loyal customers and ended the year with 750 customers, their churn rate would equal 25%. This means 25% of their customers took their business somewhere else.
How loyal are customers? If a customer has no sense of dedication to a particular brand, they are considered brand-agnostic. Building a sense of brand loyalty is important for any business as it directly correlates to an increase in customer retention rates and a decrease in churn rate.
Brand loyalists will advocate on the company’s behalf. As champions of the brand they will drive word-of-mouth marketing. Brands with loyal customers are likely to see a higher than normal customer lifetime value.
How scalable are your sales and marketing tactics? If a company’s revenue growth is directly correlated to sales and marketing expenses, it is important to optimize those efforts. If revenue decreases, but the sales and marketing expenses continue to expand, profit margins will be squeezed and could result in a loss.
This is why a scalable sales and marketing strategy is essential. Tracking key metrics and measuring performance will allow for quick strategic pivots when efforts are proving ineffective. Testing new channels, A/B testing strategies, and optimizing for conversions will allow you to scale your sales and marketing.
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How can a company influence the customer experience, resulting in an increase in customer lifetime value?
Some companies have the luxury of a true “moat,” or an effective defense against competitor disruption. Companies leveraging economies of scale, for example, can attain a much lower price point than the competition.
Most companies, however, do not have this luxury. This means they must implement tactics to improve operational efficiencies and impress customers through targeted, personalized, and relevant communication.
With churn rates the highest after a single interaction with the average company, it’s important to make the first impression positive. Customers often need education on the features and benefits of your product to truly understand how the product can positively impact their lives.
In a service business, effective onboarding can be as simple as demonstrating a dedication to customer service and availability to solve customer problems. Being attentive to the needs of a first-time customer and relieving any hesitations about their decision to purchase should be top priority for this first interaction.
An open line of communication between the company and customer strengthens the relationship and makes the company feel more human. In today’s environment, it’s more important than ever to respond to feedback, especially negative comments, and poor ratings.
Customers appreciate when their voices are heard. The simple acknowledgement that a company is receptive to feedback and their problems will be addressed can be a catalyst for repeat business.
Increasing the effectiveness of customer communication also applies to sales and marketing copy. You can measure the performance of communication with customers by assessing churn rate and ad conversion rate.
Implementing a loyalty program can be a great way to personalize the customer experience while incentivizing repeat purchases. Some common loyalty programs offer reward points, or the ability to unlock free and discounted product after the accumulation of purchases. For example, buy nine cups of coffee and get the tenth free.
Customers are proud of the rewards they accrue and companies are rewarded with an increase in customer lifetime value. An airline, for example, rewards customers who make purchases using their exclusive credit card with free miles that can contribute to the cost of a flight or accrue to a free flight.
One of the most important tactics to improve customer lifetime value is to re-engage customers who have had a previous experience with the brand. Retargeting can be a simple reminder of the company and at the very least, increase brand recognition. Products with a shelf life can greatly benefit from retargeting efforts as their time-sensitive nature will require another purchase.
Customer lifetime value is a metric that all businesses should consider when planning for future growth and projecting profitability pro formas. Businesses should implement strategies to increase the customer lifetime value, especially since the cost to retain an existing customer is substantially less than acquiring a new customer.
A good customer lifetime value definition is basically: the longer a customer stays your customer, the more value they bring to your company. Below are some statistics that prove how critical it is to nurture CLV throughout the entire customer journey:
