Customer Lifetime Value (CLV) is an important metric to measure long-term growth. It is a measure of the customer’s lifetime value to your company. According to a 2018 Criteo survey, 81% said monitoring CLV could increase sales. 68% believed that CLV data can boost retention, and 56% believed that it drives customer loyalty.
CLV allows you to monitor key indicators such as margin, retention, and loyalty. CLV helps you identify your highest-value customers and how you can increase loyalty and create more value for low-value customers. You can also see how much you have to spend on customer acquisition.
Each customer has a different CLV. A higher CLV is a loyal customer that will pay more, refer more people and buy more. A higher CLV customer is more profitable to sell to.
Calculating Customer Lifetime Value
When determining the CLV of a customer you must analyze their transaction history and behavior pattern to determine their lifespan and how much profit they will bring to your business. There are many ways to calculate CLV, but recurring revenue businesses can use one simple formula to calculate CLV.
(Recurring monthly income x customer life expectancy) – (customer acquisition costs + lifetime cost of service)
This formula tells us that in order to boost CLV you need to reduce service costs, identify cross-sell opportunities and upsell opportunities to increase monthly revenue and ensure that your customer stays with you for longer.
How to increase Customer Lifetime Value
These are the steps you need to take in order to create a strong CLV strategy.
1. Get to know your customers
To increase CLV, focusing on acquiring customers can lead to higher churn risk. This leads often to a neglect of experience that in turn results in a shorter customer lifetime. Instead, your goal should be to understand what customers value and provide the best customer experience.
Your customer-facing team must understand the customers’ needs and focus on creating experiences that will deliver long-term business benefits. This helps you analyze how CLV changes across customer segments and tailor the experience to increase CLV.
2. Identify profitable customers
You can create segments by dividing customers into high, medium, and low CLV segments by calculating the CLV. This allows you to determine the needs of each segment, and to develop proactive strategies to reduce revenue risk or to capitalize on opportunities.
Micro-segmentation of customers allows you to optimize profitability by utilizing more effective personalization. According to a survey by Formation of 2000 U.S. customers, 79% of those surveyed agreed that personalization makes them more loyal.
3. Profitable retention at scale
Retention is key to long-term growth of your business since 80% profits come from 20% customers. Machine learning technology can be used to predict CLV risk for each customer using available data. These predictions can be used to prevent high-risk customers from help you to catch them early.
You can also address risk drivers with proactive retention, which is less costly. For example, using micro-segmentation to detect high-risk customers and create personalized offers that have a higher net present value (NPV)
4. Allocate budget accordingly
You can calculate customer CLV to understand the customer journey, satisfaction, profile, and margin. This gives you insight into the amount of money you spend on each customer’s acquisition, service and retention as well as how much revenue they generate. It’s much easier to allocate budgets to marketing, sales, and retention activities once you have identified different customer segments.
5. Invest in customer happiness
Even with all the above benefits, it is easy to assume CLV is about finding high-value customers. It’s not. CLV’s idea is to create a loyal, happy customer base.
Here are some major CLV-related issues business leaders have to face:
1. Individual CLV for Every Customer
Businesses calculate CLV at the macro-level for their entire business, but don’t assign CLV to each customer at the micro-level because they lack models and analytical tools that can do such big data analysis.
2. CLV is not available
It’s one thing for CLV to be calculated for each customer. But it’s quite another to use these insights to drive customer engagement across channels and touchpoints to achieve desired business results.
3. Measure the Outcomes
Closed-loop systems can capture data and convert it to CLV intelligence. They also operationalize it through teams and systems. The outcomes are then captured at the touchpoints for iterative improvement. Due to the complexity involved and the absence of a long-term view, most businesses take years for them to reach this stage.
4. Working In Silos
Many departments work in isolation, but they are all involved in the customer’s journey. Therefore, customer data can be scattered across many silos. It is important for businesses to ensure that there are no silos and create a single view of customers. This can be achieved by focusing on CLV.
CLV is a key metric for recurring revenue businesses. It shifts your focus from the short term to the long term, and creates sustainable business advantages by linking customer experience and real business impact. Businesses must think long-term and have a single view of customers with each customer assigned CLV in order to effectively leverage CLV to drive growth. They will be able to increase their profit by keeping happy customers, who will pay more and stay longer with you.