Valentin Radu, founder of OMNICONVERT, will have his session at inOrbit 2023 on March 17th, at 12:00 (Strategy track in Europa Hall).
Author: Valentin Radu
“It is the best of times, and it is the worst of times for eComm & Retail organizations.”
After years of focusing on acquisition and not really worrying about retention, the market was changing. From clicks to relationships. From transactions to experiences. From one-time buyers to lifetime customers.
The best-in-class companies already understand that Customer Lifetime Value is THE metric to track and improve if they want sustainable growth. They’re known for incorporating CLV findings into the customer journey and thus attract new customers like moths to flames. Other companies? They fight over the leftovers.
If you’re tired of small wins, short-term gains, and spending a fortune on customers who never return, this post is for you. Come along for the ride and understand the basics of Customer Lifetime Value: the North-Star metric for intelligent companies.
1. What Is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) represents the projected net profit generated over a customer’s entire relationship with your business.
In other words, with CLV, you can determine how important a customer is to your business over an indefinite time instead of only seeing the initial value of the first transaction.
At the same time, Customer Lifetime Value places your business under a mighty microscope. It shows how healthy your business is, whether it will be successful in the long term, and how good you are at attracting and converting profitable customers.
2. Why Is Customer Lifetime Value Important?
Retail and eCommerce players know that today’s landscape is a wild card. Whether you’re a CEO, a Marketing Manager, or a CX professional, you’re chasing the same things: more revenue and a stable customer base. However, the economy is hectic and unpredictable, disruptors are changing the game, and consumers are more conscientious of how they spend their money.
Customer Lifetime Value provides the stability you need to plan for uncertainty in this context. Only by understanding the actual value of your customers can you make those data-driven decisions that drive revenue growth and improve customer experience and satisfaction.
And if certainty isn’t something you’re after, we can think of a few more reasons why tracking and improving CLV should be your top priority.
- You get more Resources to play at your full potential.
Sometimes you can’t orchestrate those fantastic brand experiences, even if you’re intentions are there. Unfortunately, how you run a business is strongly linked with the resources at your disposal.
To grow sustainably, you’ll need talented teams, money to invest, and time to plan and implement.
When you prioritize CLV, you naturally generate more revenue from your customers. You end up with more capital to invest in building talented teams, acquiring customers, or subscribing to the latest tools.
- Ad Costs keep on breaking records.
As of July 2021, all major social media platforms saw new heights in customer acquisition costs:
- Google and YouTube went up by 108%
- Facebook saw an 89% increase
- TikTok’s CPM grew by 92% increase
The costs wouldn’t have been such a problem if brands had had solid customer retention programs to get a decent ROAS in time. Unfortunately, this isn’t the case, as businesses seem to have customer retention problems.
In this case, Customer Lifetime Value delivers a hidden advantage, enabling you to design customer retention strategies that matter in the long run.
With better retention comes more revenue, which means more money to invest in acquisition.
Rather than focusing on short-term profits, CLV empowers you to see the big picture and think about your company’s growth in time. It’s the difference between scraping your budget and having disposable income to invest where it makes sense.
Knowing which customers bring the most value allows you to set the standards and strategies to acquire new customers.
You’re no longer launching your campaigns, hoping to bring in as many customers as possible. Instead, you focus on profitable customer profiles and attract people similar to your best customers. If you initially acquire a bad-fit customer, you will have to work harder on retention. CLV helps you start on the right foot with the right person and build customer relationships that benefit you in the years to come.
- You can create better products and play in a different league.
When you measure Customer Lifetime Value, you identify both best and worst products in your product assortment. Some products will be suboptimal, causing customer churn and ruining your brand reputation. Others will be universally loved, generating customer loyalty and repeat purchases.
“Your job is to recognize the best and most toxic brands and products.”
This information lets you know which products and brands to add to your offer and which to exclude.This way, you will avoid losing customers over low-quality products, build a respected brand, and differentiate yourself through the value and quality you’re offering.
- Third-party data is fading into oblivion.
Due to privacy concerns and changes in tech, you can’t count on cookies to capture data and build customer profiles anymore.
Your only choice is to trust your zero and first-party data to understand and get to know your customers.
The good news is that your store tracks all the data you’ll need. You know who’s spending, why they’re doing it, and how much they buy. You’re already tracking customer behavior. However, you must sort and give meaning to your data to create personalized experiences. Here’s where CLV comes into play, allowing you to provide special treatment to your best customers and turn them into your promoters.
3. How Do You Measure Customer Lifetime Value?
If you see Customer Lifetime Value (CLV) as your benchmark for future growth and expansion, you’d be naturally interested in tracking and measuring it.
Important disclaimer before we move on to the formulas to calculate the customer lifetime value: CLV is a prediction, not an exact figure set in stone. The CLV can be impacted by changes in customer behavior, economic conditions (such as those we’re experiencing today), and other unforeseen events (such as a global pandemic resetting the entire planet).
As such, you must review and update your CLV calculations regularly.
4. Customer Lifetime Value Formula
There are three options to choose from to calculate your Customer Lifetime Value:
- The basic CLV formula
The simplest method of calculating your CLV is subtracting the costs of acquisition and service from the revenue generated by the customer.
CLV = customer revenue – the cost of acquiring and serving that customer
While this formula shows the average customer’s lifetime value, it can also be misleading.
Businesses are more complex, and most of the time, you will have multiple factors at play within your customer relationships. This is why we have more complex formulae to calculate your CLV.
- Historical CLV
Historical CLV refers to the value brought by a customer over a specific period in the past. To calculate the Historical CLV, you must gather customer purchase behavior data. This includes the amount spent, the purchase frequency, and the length of time they have been customers. When you have all the data, you can use the formula to calculate Historical CLV:
Historical CLV = (Transaction 1 + Transaction 2 + … + Last transaction) * Average gross margin
This approach also considers other costs: cost of returns, acquisition costs, marketing tools, etc.). However, even if the formula gives a more accurate result, it can be complicated to apply it to each individual customer.
- Predictive CLV
This method includes both previous transactions and behavioral patterns to predict the CLV of each customer. It’s also a living value, as the predictions become more accurate and precise as the relationship evolves and customers spend more in your store. The formula for Predictive CLV is more complex and more accurate:
Predictive CLV = (Average monthly transactions * Average order value) * Average gross margin * Average customer lifespan
Update the formula with your business data, and you’ll get a highly-accurate CLV prediction for your customers.
5. Ways to Improve Customer Lifetime Value
It’s important to note that a sale is only made once the customer sees a result.
While the money might reach your account, you will see loyalty, retention, recommendations, and future revenue only if the current customer experiences the value you promised. With this mindset in mind, let’s dive into the roadmap to follow if you want to increase Customer Lifetime Value:
- Start with the Acquisition
Remember that mindful acquisition plays a vital role in predicting CLV. Invest your resources into customer research and identify your Ideal Customer Profile (ICP). ICPs buy the most often (their Average Purchase Frequency Rate is high), spend the most (highest AOV), and are active (they purchased the most recently). Use RFM segmentation to identify your most valuable customers and target customers who share their traits, characteristics, behaviors, preferences, etc. Use your customer data to create an audience that targets customers more likely to remain loyal and make multiple purchases over time.
- Invest in Retention
Everyone wants to be successful, but only some are serious about doing the work.
If better CLV is your priority, you have to be intentional about improving customer satisfaction and loyalty. This requires providing excellent customer service and addressing any issues promptly and sincerely. Usually, customers will only leave a brand if they don’t like how they’re treated or the relationship isn’t convenient. Focus on keeping your prices fair, creating intuitive shopping experiences, and offering convenience in payment and product delivery.
However, it would be best if you were mindful of resource allocation. It’s not fair to give the same treatment to all customers. Instead, a high-value customer segment should get special treatment and know how much you value them.
- Take Advantage of cross-selling and upselling strategies.
Cross-selling and upselling strategies can be implemented in various ways: in-person sales, email marketing, and on-site recommendations. However, don’t throw your offers blindly. Invest in customer research to understand your customer’s needs and preferences, then provide personalized and relevant recommendations. Focus on products that genuinely add value to the customer experience and help customers progress in their lives.
- Engage your customers.
People don’t like to feel like another brick in the wall. They want to feel special, need fair treatment, and crave connection.
Use all your communication channels to keep customers engaged and ensure customer relationships go both ways. Create a community around your Social Media channels and allow customers to interact with your brand, voice their opinions, and share their success stories.
- Be mindful of your product assortment.
Being mindful and data-driven about your product assortment means looking at customer demand and product profitability & quality before deciding to sell something. The needs and preferences of your customers change, so you should also change. Eliminate toxic products, continuously improve existing products, and update your shop to make your customers’ lives easier.
- Be data-obsessed.
Gone are the days when gut feelings and market trends were enough to shape a business. Yes, an entrepreneurial instinct is always helpful in eComm & Retail, but your data should be in the driver’s seat. Perform customer data analysis regularly to identify patterns and trends in customer behavior, then use these insights to inform your business decisions.
Money is scarce; times are hard, and CLV is bad to disregard.
Poor rhyming aside, Customer Lifetime Value truly is the key to unleashing the true potential of your customer base, creating more loyal customers, and placing your business on a steady growth path. By focusing on acquiring high-value customers, improving customer satisfaction, and maximizing the value of each transaction, you will set your business up for long-term success.
Now it’s time to start making moves and unlock the full potential of CLV in your organization!