Maintaining a customer is a textbook way to maximize value. However, the concept of customer lifetime value (CLV) doesn’t automatically translate into the same value each and every time.
The way that a brand goes about calculating and improving the value of its retained customers can make a big difference in how its repeat clientele impacts its bottom line.
What is Customer Lifetime Value? (CLV)
The lifetime value of a customer (typically referred to as CLV or CLTV) is a fairly simple concept. In essence, it is the total financial value or worth of a customer to a business over the entire length of their relationship.
This falls in line with the classic business concept that retaining a customer is significantly more valuable than gaining a new one. According to Harvard Business Review, the average value of a retained customer varies when compared to acquiring a new one. However, on average, the value is at least five and as much as 25 times greater.
This massive inherent value makes retaining customers a top priority for many marketing teams. For instance, founder and CEO of the full-service marketing agency Hawke Media, Erik Huberman, underscores the importance of customer lifetime value throughout his recent book The Hawke Method.
In the book, Huberman breaks down his “Three Principles of Marketing.” This starts with awareness, which focuses on aiding customers in discovering a brand. However, the second two principles, nurturing and trust, both revolve heavily around the concept of a customer’s lifetime value.
Huberman points out that nurturing a potential client goes right past the point of purchase. In addition, building trust between a brand and its customers has to do with consistency and expectation as a customer continues to interact with a company over time. Both nurturing and trust revolve around the effort that companies put into retaining existing customers as they go through the customer journey time after time.
How to Calculate CLV
The ability to calculate the lifetime value of a customer isn’t just a nifty statistic to add to the endless data lakes that companies sport these days. It’s an essential piece of information. For some, it’s the only metric that matters. This is because CLV shows a company how long it takes to recoup the investment that goes into acquiring a customer in the first place.
After all, it’s cute to compare acquiring and retaining customers, but the truth is, most customers play both roles over the lifetime of their relationship with a company. By calculating CLV, a business can estimate how long it takes to gain back the money that they invested in earning a customer’s business in the first place.
According to Hubspot (who offers a free CLV calculator download right on their website), there are three steps to figure out a customer’s lifetime value:
- Begin by calculating the average purchase value of each customer.
- Multiply the average purchase value by the average number of purchases made to determine initial customer value.
- Calculate the average customer lifespan and then multiply that by the initial customer value.
This process varies dramatically with each business. However, it’s well worth the investment to ensure that a company is maintaining profitable customer relationships over time.
While calculating CLV is important, companies shouldn’t stop there. They should use that information as a springboard to discover ways to improve the overall value of each customer over time, as well. Here are some recommendations for ways to improve your customers’ CLV through either gaining more revenue from them or reducing the costs of maintaining the relationship.
1. Add a Personal Touch
A personal touch is a great way to cultivate customer loyalty. Anything from a hand-written thank-you letter to a personalized customer service experience right down to addressing emails on a first-name basis can make a difference on your CLV.
Now, this tip tends to work better for smaller companies or those with larger products or services — and thus, a smaller number of orders. After all, a company can’t include a hand-written letter every time they sell a stick of gum. Nevertheless, any time a highly personalized element can be added to a business interaction, it fosters a sense of respect and appreciation that can turn customers into advocates for your brand.
2. Perfect Customer Service
Customer service (CS) was already brought up once. But CS is so important for CLV that it deserves its own section.
Your customer service is particularly important when it comes to repeat customers. It’s one of the primary touchpoints where you will continue to interact with clientele who are already familiar with your brand.
Make sure to set up a customer service department that can provide prompt, polite, respectful, and competent service. This shouldn’t be done as a flourish or a favor that happens after the point of purchase. Instead, it should be treated as a fresh opportunity to encourage repeat business every time a customer makes contact with your brand.
3. Feature Customers
There’s nothing quite like shining a spotlight on someone to make them feel special. Companies can do this with their loyal customers in a variety of ways.
You can call out a customer in a social post or email newsletter. Or, you can ask them to write reviews and then respond to their feedback. You can even make a public display out of taking an existing customer’s advice.
Featuring customers alongside your company doesn’t just humanize your brand. It can also go a long way in developing individual loyalty and interest from those included in your conversations. You may even benefit from some social proof as others see you focusing on real-life customers.
4. Reward Your Existing Customers
It’s easy to offer bonuses and promotions to new customers. This can help spread awareness and convince those on the fence to try your brand.
But too often this mentality isn’t applied to existing customers — even though that can have an even greater effect. By offering rewards to existing customers, you show them that you want to honor their continuing patronage. This can also expedite their next purchase, increasing their overall CLV in the process.
Rewards don’t have to be massive. It can consist of something as simple as a targeted coupon or special early-bird access to an event. If you’re serious about investing in your past customers, though, you can also go for something bigger, like a full-blown rewards program.
5. Recruit Your Customers
Another great way to improve CLV is by getting your customers themselves involved in improving the statistics. This may sound complicated on the surface, but all it takes is a good referral program.
Using a referral or affiliate program allows your customers to use their past experiences to convince others to join your brand. This has multiple benefits. First, it reduces the effort needed to acquire new customers, thus reducing the costs involved with their overall CLV. It also encourages existing customers to continue to patronize your brand, as it’s on their minds more often.
There are many referral and affiliate program SaaS platforms out there, at this point. All you need to do is set one up, create instructions to join, and spread the news. Your satisfied customers can take it from there.
6. Start Strong
Finally, when discussing CLV, it’s easy to get focused on the long-term stuff. After all, a longer customer relationship typically equates to greater profit.
However, if you want to increase CLV, you also need to think about the beginning of the process. The way that you acquire new leads, cultivate them, and turn them into paying customers can say a lot about how valuable those customers end up being.
If your average customer’s initial impression of you is sub-par, it can reduce the number of first-time buyers that return to you in the future. If your onboarding process — like selecting a product, paying for it, or learning how to use it — is tedious or confusing, it can put a bad taste in peoples’ mouths.
Make sure you’ve perfected your initial interactions with new customers. The goal shouldn’t just be to complete a transaction. It should also include creating a positive impression of your brand as a whole. That way, each time you come up, it evokes a desire to repeat the experience and tell others about it, rather than the opposite.
Boosting Your Bottom Line Through Your CLV
It’s tempting to focus on things like customer acquisition and closing sales. However, if you want to establish sustainable, long-term profitability, you have to think bigger than that. You have to think about your customer lifetime value.
Start this process by making sure that your entire team is aware of the importance of CLV. Then, calculate your current CLV to see how much effort you’re putting in and how profitable (or not profitable) that effort is.
From there, look for ways to improve your CLV, so that you can turn each acquisition into a prolonged and profitable relationship that benefits both your customers and your bottom line for years to come.