Companies use many different metrics to quantify their success. Some of the more common ones include: reports to track and measure operations data, website traffic, and employee performance. Beyond these, customer lifetime value (CLV) has been identified as one of the most helpful business metrics.
CLV carries special significance in the context of business growth. As a measure of performance, it represents the cumulative value that repeat customers bring to a company. This is particularly important since it’s more cost-effective to add value to existing customers than to find new ones.
Companies seeking to accelerate growth and optimize revenues should pay close attention to CLV metrics. Doing so enables business owners to:
- Identify their highest-value customers
- Determine their spending and investment priorities
- Generate advanced insight into other key performance indicators (KPIs)
The points below examine each of these concepts in further detail and offer advice on strategies organizations can use to enhance their customer lifetime value propositions.
1. It helps to determine who your high-value customers are
Customer lifetime value calculations enable businesses to segment customers into categories that describe the level of lifetime value they offer. For instance, separating customers into high-paying, average-paying, and low-paying groups. However, there are many other ways to approach this concept. Another widely used model applies the following four categories to a company’s customer base:
- Demographic segmentation: This approach segments an organization’s customer base according to demographic factors such as age, gender, marital status, family status, education level, income level, race, ethnicity, and/or occupation.
- Geographic segmentation: Companies with large and far-flung customer bases can apply geographic category filters. These potentially include country, region, state/province, city, and neighborhood/suburb.
- Behavioral segmentation: Customers engage with businesses and brands in different ways. Behavioral segmentation describes these diverse forms of engagement, often by examining the variables at play during the engagement process.
- Lifecycle segmentation: A strategy that groups customers according to where they are in the buying process. This encompasses five key stages – awareness, consideration, selection, retention, and advocacy.
2. Customer lifetime value helps you to allocate your spending properly
Businesses can learn a great deal about their customers’ profiles through detailed customer lifetime value calculations. This, in turn, helps decision-makers to develop evidence-based strategic resolutions regarding budgeting priorities and spending allocations. More specifically, it can function as an effective guide for assigning resources toward acquiring, serving, and retaining customers.
Successful entrepreneurs and business management experts consistently identify careful and accurate budgeting as one of the essential keys to small business success. In respect of quantifying and extracting insights from CLV calculations, budgeting offers multiple distinct advantages, extending to:
- Short-, medium-, and long-term strategic planning
- Decision-making and priority identification
- Securing financing and/or investor commitments
Along with customer acquisition cost and customer profitability, customer lifetime value represents one of the three vital calculations business owners and managers should make when setting a marketing budget.
3. CLV helps monitor other KPIs of the business
Monitoring customer lifetime value forces business owners to pay closer attention to other crucial performance indicators and measures of business success. Prime examples include margins, customer retention, and customer loyalty – all of which factor into CLV calculations.
How to calculate customer lifetime value
Businesses can use a simple CLV formula to obtain a high-level overview of lifetime value performance, or a detailed formula that yields more comprehensive metrics.
The simple formula runs as follows:
- Determine the business’s annual revenue per customer
- Multiply it by the number of years in the customer relationship
- Subtract the customer acquisition cost
A more comprehensive version draws on similar principles but considers factors with greater precision. Three pieces of data are required for the detailed CLV formula:
- The average gross margin per customer across the customer’s lifespan
- The company’s customer retention rate
- The internal rate of discount
Then, using those data points, the calculation can be completed as follows:
- Gross margin per customer X (Customer retention rate / [1 + Rate of discount – Retention rate])
In addition to greater precision, the detailed method offers several other advantages. For instance, it accounts for both inflation and positive or negative changes in overall revenue. The simple CLV formula does not.
How to improve customer lifetime value
Taking measured, strategic steps to improve customer lifetime value supports both the short- and long-term financial health of the business. This is particularly relevant to highly competitive industries where the customer experience often plays an outsized role in generating loyalty.
Three popular strategies for enhancing customer lifetime value include paying attention to customer satisfaction, fostering open communication between the customer and the business, and creating appealing rewards programs.
Maximize customer satisfaction
Satisfied customers represent one of the most reliable sources of recurring business revenue. Experts widely recommend investing time and resources in generating an enjoyable, customized, and positive customer experience, as positive experiences are a foundational driver of satisfaction.
Strategists can begin by measuring existing levels of customer satisfaction. These insights highlight the company’s strengths and weaknesses, as well as areas for improvement. Surveys have historically served as a means of extracting such insights, but they have significant limitations. For instance, low response rates can skew results and negatively influence their reliability and accuracy.
As alternatives or supplements to surveys, consider the following approaches:
- Analyze customer feedback: Consider both positive and negative feedback, and look for trends. Enhance the visibility and impact of the aspects of customer experience that drive positive feedback, and implement decisive actions to address the shortcomings that tend to prompt negative feedback.
- Pay attention to loyalty trends: Which products or services generate the highest levels of repeat sales? For example, a restaurant can analyze the food and beverages customers order most often, and at the greatest rates of recurrence. Then, apply these insights to broader indicators of customer satisfaction, which include CLV along with average cost per order and repeat frequency.
- Track company performance on social media: Customers increasingly use social media to amplify the reach of their feedback. This trend applies to both positive and negative experiences. By monitoring social media channels, you can ensure swift, effective, and public resolutions to customer complaints.
Maintaining open and accessible lines of communication is another vital aspect of creating a positive customer experience. Communicating with customers is one of the most direct and effective ways to uncover insights into the successes as well as the shortcomings of operational policies and strategies.
Depending on the nature of the business, communication strategies can be proactive (the business contacts the customer) or reactive (the customer contacts the business).
Examples of proactive approaches include:
- Email marketing
- Calling customers to support relationship-building efforts
- Using social media to engage existing customers and court new ones
Reactive approaches are most effective when the company representative engaging the customer practices the principles of active listening. That is, let the customer speak, absorb what they are saying, and do not interject with comments, objections, or questions.
Offer exclusive rewards and programs
Loyalty programs and exclusive rewards tap into a powerful aspect of customer psychology. And when leveraged effectively, they can make the customer feel individually valued. That feeling of being “special” to the business has the potential to unlock greater levels of long-term value as the customer returns again and again.
Some common and innovative examples of rewards and loyalty programs that drive improvements in customer lifetime value include:
- Points programs: These programs award customers points for making purchases. Points accrue over time and can be exchanged for rewards. The more enticing the rewards, the greater the engagement the program tends to generate.
- Tier programs: Tier-based rewards programs allow long-term customers to “unlock” special perks by reaching a certain level of spending or loyalty. Like points programs, tier programs that offer meaningful incentives tend to be the most appealing.
- Gamified programs: Gamification introduces elements of fun and direct personal interaction with the rewards program. Randomized prize draws are a popular example, but digital platforms have greatly expanded the range of possibilities.
- Mission-driven programs: Customers are often drawn to companies they perceive as sharing their social values. Mission-driven programs drive this point home, creating a potent psychological and emotional connection that can encourage long-term loyalty.
- Referral programs: Referral programs offer special benefits and bonuses to customers who bring new business to the company.
These represent only a few of the many different strategies organizations can leverage to enhance customer lifetime value through rewards and loyalty programs. As a guiding principle, businesses should strive to personalize their programs and build a degree of agility that allows the company to respond to unexpected shifts in customer sentiment and external influences affecting the industry, market, or wider economy.
Get help improving CLV
Enhancing and optimizing customer lifetime value delivers powerful benefits for companies in any industry where there are direct interactions between the business and its customers. Sales teams frequently function as the frontline drivers of business growth and customer relations, and improving their performance often yields similar benefits for CLV and other KPIs.
The Skynamo sales management platform offers powerful tools to businesses and sales team managers seeking deeper insights and greater levels of control. Drop Skynamo a line to learn more about its powerful digital products and the positive impacts they can make.