How to Increase Customer Lifetime Value
Customer lifetime value is a powerful metric. In general, the higher your customer lifetime value and the more customers you have, the more revenue you can expect to make from your business. In turn, this can lead to increased profit. So, it is helpful to know how to increase customer lifetime value.
This post discusses the importance of customer lifetime value, how to calculate customer lifetime value, and, ultimately, how to increase customer lifetime value.
What is Customer Lifetime Value?
Customer lifetime value is the total amount of revenue a business expects to earn from a single average customer, over the entire business relationship. What makes this metric so powerful is that it is predictive: it estimates future revenue, which helps inform current business plans.
In this blog we use revenue, but profit is another way to consider customer lifetime value. Revenue is the total amount of money a customer or customers brings into the company, without considering expenses. Profit is the amount of money a company makes per customer or customers, when expenses are subtracted. When looking to increase customer lifetime profit, one can consider how to lower business expenses in addition to increasing customer retention. We do not go into that aspect of customer lifetime profit in this post.
How to Calculate Customer Lifetime Value
There are multiple formulas one can use for how to calculate customer lifetime value. They vary in complexity, with some models incorporating discounts, fluctuating costs, or customer trends. The more long-term customer data you have, the more detailed your calculation can be. A high-level equation to calculate customer lifetime value (CLV) is as follows:
CLV= Average Customer Revenue x Retention Period
In this simple equation, retention period stands for the total time period in which the average customer remains a customer. To obtain a more accurate, detailed customer revenue, you might create a predictive model. Such a model may predict the average customer to bring in $5,000 of revenue in year one, but perhaps this customer is commonly upsold to $10,000 revenue in year two. Historical customer data allows such complexities to be incorporated into the customer lifetime value formula.
The Importance of Customer Lifetime Value
When running a business, it can be easy to focus on acquiring new customers. While closing new deals is important for revenue, so is maintaining existing customers. In other words, if business A has less customers than business B but business A’s customer lifetime value is much higher, business A could make more revenue. At the same time, it is often easier to upsell current customers by expanding their selected products or services than it is to acquire new customers. A customer who already has a relationship with a company is more likely to buy more products or services than someone who would be a new customer. In an ideal world, a business focuses on both customer acquisition and retention.
So, a higher customer lifetime value can pay off exceptionally well for a business. The next logical question is, how to increase customer lifetime value?
How to Increase Customer Lifetime Value
Overall, there are two aspects to increasing customer lifetime value. The first principle is to not lose customers. This means employing strategies to increase retention. The second is to increase the revenue that each existing customer brings in– or increasing customers’ products and services.
While exact strategies to increase customer lifetime value vary by industry and company, below are some general guidelines to follow.
Create a Content Stream
In the digital age, creating content consistently no longer just sets you apart– it is required to maintain a strong business presence. A solid content pipeline increases company authority, causing current and future customers to trust you. A customer who trusts you is vastly more likely to expand services or, at the very least, not change loyalty to a different company. Consistently posting new content also keeps your company top of mind for current customers, increasing the likelihood of expanding products or services.
Creating content that stands up to the test of time also gives value to your customers between sales. When creating content, focus on holding attention by delivering high-value, educational tips and insights. When customers see the free value you deliver, they are likely to believe in your product and purchase your services. So, where to post this content? Depending on the industry, Instagram, LinkedIn, and blog posts are all viable platforms.
Email Marketing
Like creating a content stream, email marketing is a great way to remain top of mind for customers. Unlike publicly available content, emails carry a personal touch, as they arrive directly to customers’ inboxes. This gives you a chance to deepen customer relationships, expanding trust and brand loyalty. Company news, educational content, and stories are all great content pillars to focus on in emails.
Gather Customer Feedback
Running quick, easy surveys helps your customers remain engaged online while giving you direct insight into their preferences. For example, run polls on Instagram around which type of content they prefer, what they want to hear more of, or even which product they like best. Then implement this feedback into your offerings. For example, if they love a certain feature in your software, see if you can expand upon it or focus on promoting it.
Focus on Customer Service
Give customers as much support after they invest in your offerings as when trying to make the original sale. Could you expand your customer service team? Increase response time online? Inadequate customer service is a quick way to lose customers to a competitor. Today, users expect a fast online response time to any issues.
Improve Customer Lifetime Value: Business Growth
While these strategies are not always easy to implement, focusing on customer retention is essential to business growth. The more customers you have, the more stable your business is. In addition, happy customers are likely to spread the word about your business– giving you another customer acquisition stream.
Have questions about these strategies, or are wondering what makes the most sense for your business? We are happy to have a conversation. Simply reach out.
