Customer Lifetime Value

7 effective ways to improve customer lifetime value (CLV)

To thrive in the experience economy, businesses must keep their customers at the core of what they do. However, acquiring new customers is a challenge for many companies. According to recent data, acquiring a new customer can cost a company five times more than retaining an existing customer. 

It’s also easier to sell to an existing customer as the success rate of selling to a customer you already have is 60-70%, while the success rate of selling to a new customer is 5-20%. So, it makes sense to engage customers for longer and find ways to increase their lifetime value. This is where CLV comes into play.

What is CLV

CLV, or customer lifetime value, is a company's most critical commercial metric. CLV tells you exactly how valuable your customers are to your business. In other words, how much will they spend on your products or services as a customer? 

Knowing CLV provides valuable insights that you can use to keep your existing customers engaged and develop strategies to acquire new customers. You can also spend less on new customer acquisition initiatives when you increase the value of your existing customers by recognizing and rewarding them for their brand loyalty.

Why is customer lifetime value important to your business?

Knowing CLV is essential to understand how much value your customers create for your business and developing ways to retain them for a more extended time. In addition, CLV provides a number that is valuable for adjusting your customer acquisition strategies and identifying early signs of attrition. Finally, calculating customer lifetime value is crucial for companies encouraging customers to enter into long-term relationships, such as a SaaS company or a paid media subscription. 

Measuring customer lifetime value helps businesses:

  • Measure the financial impact of their marketing campaigns. 
  • Rethink their customer strategies and spend less time acquiring lower-value customers.
  • Identify the most valuable customer segment.
  • Make an accurate prediction of business revenue. 
  • Spot early signs of customer churn. 
  • Improve customer retention and business profitability

How to calculate CLV 

To determine your customer's lifetime value, calculate their average purchase value and then multiply that number by the average number of purchases. This will give you average customer value. Then, once you calculate the average customer lifespan, you can multiply that by customer value to determine your CLV. 

So, Customer Lifetime Value = Customer Value * Average Customer Lifespan.

(Where Customer Value = Average Purchase Value * Average Number of Purchases)

For example, let’s see how a video streaming company may look at its CLV. Based on the data available, it can see that the typical customer spends $10 every month over a six-year relationship. So the company can find its CLV by multiplying those three numbers — 10 x 12 x 6 — for a value of $720. But why does that number matter?

Improve your CLV with these 7 methods

Improve your CLV with these 7 methods

Businesses and brands can adopt several strategies to boost their CLV. Here are 7 ideas for companies that want to improve their customer lifetime value. 

  1. Customer loyalty programs: Reward programs are a great way to inspire customers to stick with a brand for a long time. With personalized loyalty programs, brands can connect with their customers at a deeper level and turn them into brand ambassadors so they promote your brand everywhere they go. Effective customer loyalty programs keep the customers engaged with the brand for an extended period of time but also improve their purchase frequency and average order size. Airline frequent flyer programs and restaurant punch cards are examples of customer reward programs. 
  2. Optimize customer onboarding process: Customers buy from a business because they trust it. By setting up a seamless onboarding process, brands can reciprocate their trust and, along the way, retain and delight more of their customers to increase their CLV over time. In addition, a positive onboarding experience provides the initial hand-holding that customers need after purchasing with the business and helps companies retain customers for years.  
  3. Cross-selling and up-selling: Amazon does it so well. So do a lot of other leading e-commerce companies. You cross-sell when you recommend one or more products that would likely complement the item the customer is purchasing. For example, when you show a pair of athletic socks when the customer buys a pair of running shoes. Up-selling occurs when you sell a better or more expensive version of the product the customer is interested in. For example, if you are buying a laptop and the eCommerce site shows you a range of other laptops with more features or better specs, the site is upselling you. When done right, cross-selling and up-selling improve your average order size and overall CLV. 
  4.  Invest in your customer service: 90% of Americans are more likely to do business with companies with solid customer service support. So if you are looking for ways to accelerate your customer lifetime value, it’s essential to focus on your customer service and embrace ways to make it excellent.
    You can take customer service to the next level by offering your customers customized products and services, omnichannel customer support, and comprehensive return and refund policies.
  5. Create meaningful and personalized content: A content marketing strategy that identifies and solves customers’ deepest pain points helps businesses build long-lasting customer relationships. You can make your customers feel more engaged with targeted content and email campaigns.  People who buy products marketed through personalized email campaigns spend 138% more than those who do not receive email offers. So, whether you are connecting with your audience through email campaigns, content, or case studies, keep them at the core of your communications, and they will be more likely to come back to spend money with your business. 
  6. Listen to your customers: Your customers have many emotions. They appreciate when you reach out to them for feedback and improve where you can. When they feel heard and recognized, they become your brand advocates and promote your business on social media or through word of mouth. To see how happy and satisfied your customers are, you can run simple surveys asking them to rate your brand experience on a scale from 1 to 10.
  7. Increase your pricing: In a highly competitive business environment, it is not always feasible for businesses to increase their pricing. However, it can directly impact your CLV and profit margins when done correctly. Consider competitor pricing and your product USPs when increasing your product pricing; chances are, customers will happily pay for it. 

Final thoughts 

U.S. companies lose $136.8 billion annually due to avoidable consumer switching. You can, however, significantly reduce your customer churn and improve customer lifetime value by building long-lasting relationships with your customers. To achieve this, creating long-term value for your customers is crucial so they stick with your brand. 

Don’t forget: Increasing customer retention by 5% can improve your profits from 25-95%. 

At Kellton, we help companies develop future-proof digital products and create new revenue streams. If you need help with product development or product analytics to drive your business growth, get in touch.