Running a business and acquiring customers is already hard enough. Growing it is another story that requires you to use different CRM marketing software and knowing several business metrics.
But in this post, weâll focus on the aspect of business metrics, most specifically, a metric that allows you to know what customers to focus on.
That metric is famously known as customer lifetime value. This particular metric allows you to know how much dollar value a specific customer brings to your business.
Although itâs an important number to know, most businesses tend to overlook this simply because they donât know how to calculate it.
But after finishing this post, youâll know everything about customer lifetime value including how to calculate it and why itâs important for your business.
Customer lifetime value is how much value a single customer brings to your business. The number you come up with in this metric represents the total amount of money a customer is expected to spend in your business.Â
If the CLV of an average small restaurant customer is at $500 and the cost of customer acquisition (marketing, advertisements, promos, etc.) is at $800, then you can conclude that the restaurant is operating at a loss.
Without knowing the CLV, the business might not notice that the ROI of their marketing efforts is negative. This prevents the growth of your online business or physical store.
By knowing this metric, a business can rethink its marketing strategies and restructure its sales funnel to increase the value of its CLV and lower the cost of its marketing.
There are a lot of variations when it comes to the calculation of a customer lifetime value but you donât need to know each one of them. All you need is the simplest way to get this value:
Letâs put this into context:
Innocent Drinks is a global company that sells juices and smoothies to its customers.
An avid customer who buys their smoothies could be worth:
An average customer who buys their juices could be worth:
Given the data above of which set of customers bring more dollar value to the company, Innocent Drinks now knows which set audience should they advertise more to and which group should they spend more on customer retention.
This also works on a business thatâs in the services sector. Take language teaching services for example.
A client who takes English courses could be worth:
While a client who takes Spanish courses could be worth:
Now for this example, itâs clear that a client who takes Spanish courses brings more money into the business. But of course, the business also needs to account for how many clients take Spanish courses vs. English courses.Â
Your customer lifetime value isnât just knowing how much money a customer can bring to your business - itâs just one aspect of it. Knowing your CLV also gives your business an insight into if there are any changes needed to be done in your marketing.
You might wonder why weâre talking about customer acquisition cost (CAC) when this article highlights customer lifetime value? Well, knowing the relationship between CAC and CLV can also help in growing your business.
Firstly, the meaning of customer acquisition cost is simply what its name states - the cost of acquiring a customer. This encompasses all the money youâve spent on your marketing efforts. This includes all marketing campaigns both offline and online.
Second, as we defined earlier, customer lifetime value is how much revenue a single customer contributes to your business.Â
Now the connection between these two metrics will tell you whether your marketing campaigns are performing as expected.
When it comes to both variables, you need to have an inverse relationship between them with the CLV having the higher value. Why? Because this means that the higher your CLV is and the lower the CAC value, the more profit youâll stand to make.
When the CAC is higher than the CLV, it only means that youâre spending more on marketing than the dollar amounts your customer is willing to spend.
If youâre looking for the ratio, just divide the CLV by the CAC.Â
As mentioned earlier, calculating your CLV goes beyond knowing the dollar value of your clients, it can help a business grow and give its customers a better customer experience.
To convince you more of the importance of CLV, take a look at these benefits:
With this information alone, youâre able to increase your revenue by marketing the right products to customers who are willing to spend more frequently with your business.
If youâre looking at your clients as equal paying customers, then youâre completely wrong. By calculating the CLV, youâll see that there will always be customers who buy more and frequently than the rest.
You can determine which customers you are going to spend more marketing efforts on and which one you should spend effort on retaining.Â
Ideally, youâd like to retain your high CLV customers since they already have a higher frequency buy rate than the low CLV customers. For the ones who are on the low CLV value, you should think of how you can market to them effectively so theyâll spend more on your business.
Thereâs a reason why your customers buy your products. It usually is because your products solve a problem or it can make something in their lives easier.Â
Whatever it is, you can always sell them a better version of it. This is how some businesses grow using upselling. They sell an upgraded version of a product thatâs either more effective or faster.
So how does CLV help with this? It can help by letting you know which products have the highest profitability. And with this, you can upsell the higher version of these products to your customers.
Businesses that sell a variety of products deal with different types of customers. Just like the example above, Innocent Drinks deals with consumers who like their smoothies, juices, and other products.
Calculating each of the CLV will let you determine which among the subset of your audience pays more. And itâs up to you whether you double down your marketing efforts on those customers or you put more effort in making the other types spend more.Â
Either way, it helps boost your businessâ revenue.Â
Now that you know what customer lifetime value is, how itâs calculated, and why itâs important, itâs time to know how you can improve it.
Email marketing is still one of the top channels that businesses use to promote their products. Thatâs why marketers still spend ample time to find business emails, contact numbers, and names to grow their list.
Now that you know the concept of CLV, donât use a one-size-fits-all email marketing campaign. What you can do is segment your list depending on the interests of your customers.
For example, customers of a financial service company will have different interests. Some are more interested in what cryptocurrency to buy while others would like to know more about NFT platforms, and some just like to learn about stocks.
Segmenting your email list and creating customized content for people with different interests will yield much greater results for your email marketing campaign and a higher conversion rate.
The more âpersonalizedâ an email is or the more the email is constructed to a customerâs interest, the more they will be engaged and be inclined to buy a product or use a service.
This might be a no-brainer but some businesses donât follow up on their customers after the transaction is done.Â
If you want to increase customer retention, customer loyalty, and buying frequency, you need to take care of your clients.
If youâre in the service industry, your clients are coming to you because you solve a certain problem they have.Â
And a way to give back to your clients is to teach them something that they can benefit from.Â
If youâre a digital marketing agency, teach them how they can improve their website ranking or provide them with an SEO tool. If your target market is students, give them study materials that they can use.
Doing these acts will go a long way. Your customers will appreciate your business teaching them a thing or two about your strategies and secrets that can improve their current state.
Take a look at how iNecta, a SaaS company, uses its platform to teach its clients to learn more about the intricacies of running a business and how they can be more efficient in managing inventories.
Aura, whoâs an authority in the Amazon selling niche, teaches sellers how they can automate their Amazon FBA business and other topics on Amazon selling.
On the other hand, VPNoverview teaches its readers all about cybersecurity for free with nothing to sell.
A way to separate you from the pack isnât limited to giving discounts and promos. It could be how you conduct your service and the products you sell.
If you canât do it through these things, your business can be unique by how you serve your customers. We all know those businesses that have exceptional services that make us want to come back to its premises every time.Â
Another unique way to get an edge over your competitors is through hosting a podcast. This allows you to be connected to your audience even more.Â
Although it might seem like starting a podcast and looking for podcast hosting services might be a hassle, the ROI of this activity can benefit your business in terms of exposure and sales.
Podcasts are a hit right now. People listen to it while they go to work, when theyâre relaxing, or even when theyâre at the gym.Â
If you want to increase their buying frequency and have a long relationship with your clients, loyalty programs can do the trick.Â
Loyalty programs fall under the big umbrella of loyalty marketing. They are specifically designed to incentivize customers when they choose to do business with you.
Loyalty programs are even used by sellers in top eCommerce platforms like Shopify and Amazon. Store owners incorporate this strategy because it simply works.Â
Customers would rather spend money on a business that incentivizes them. Since theyâre already spending their money, they might as well get something back in return.
No matter how we try to make our business perfect, that just canât be achieved in todayâs world. Sometimes, your product can have malfunctions or your service might have some lapses.
When these unfortunate scenarios happen, your business needs to be easily contacted. And this is where having a social media account comes into the picture.Â
Nowadays, people who are looking to contact a business directly go to social media. They search for the business and contact them there.
Take a look at how Mixam provided all the details on where their audience can reach them:
It is complete with a phone number, email, and their different social media accounts.Â
Some businesses even incorporate a chatbot so that customers who have questions can use it to answer basic questions.
If your customers canât find you to address their issues, you run the risk of them not doing any business with you anymore. You mightâve missed the opportunity of converting a customer to a repeat client.
You have to understand why people are looking for businesses on social media. The reason is they want a fast response from your end.
With the rise of 24/7 customer service and the usage of chatbots, businesses have no excuse not to cater to an issue of a customer no matter what time of the day it is.
If these people donât get the service they expect, chances are theyâll be all over social media complaining about your product and service. Theyâll be tweeting and creating posts about their experience with your business.Â
Itâs important to do everything you can to address these issues quickly. If you have the resources, hire a person that solely focuses on this aspect of your business.Â
Thatâs why big companies have a whole team dedicated to this business concern only. They know how much of an impact this can have on the business.
We mentioned above that customer retention is a much cost-effective way to boost profits than customer acquisition but this doesnât mean that we should completely stop doing marketing.Â
Marketing is one of the pillars of a successful business. The way they engage their customers through their ads is how they acquire new clients and assure the old ones that theyâre transacting with the right company.
Videos are a great way to create engaging advertisements. Creating videos is still one of the top eCommerce marketing strategies out there.
If youâre not outsourcing videographers, just make sure to read some tips on how to make your videos look professional.Â
But engaging ads arenât just limited to videos, it can also come in the form of print advertisement or other traditional strategies.Â
An added benefit of having a great and engaging advertisement is the chance of getting free press which extends the reach of your advertisement.Â
Take a look at this clever print ad by KitKat during the lockdown period:
Genius, right? Now take a look at how a simple advertisement got different publications talking about it:
Youâll never see a high buying frequency in your CLV formula if you canât make your buying process fast and smooth for customers. This applies to both physical and online stores.
When your customers are at the checkout page or the counter, the last thing you want to do is bombard them with questions, forms, or unexpected shipping fees. These things are major turn-offs and can increase your cart abandonment rate.
Another important factor that they consider when on the checkout page would be whether the transaction is safe. You need to assure your customers that transacting with your business is safe and secure.
You can add trust badges all over your website or you can dedicate an entire page about safe and secure shopping like how Mannequin Mall did:
So itâs very important to eliminate any variable that can make that happen. Eliminate friction and unnecessary forms to make for a better customer experience.
Donât be one of those businesses that donât talk to their clients after a purchase is made. What you can do is provide a thank you note with every purchase, send a welcome email, or even surprise them.
If you donât want to manually do these things, consider using email software that allows you to automate this process.
Doing these extra steps helps you build your online brand or overall business in general.
These acts go a long way and will be appreciated by your customers tremendously. Itâs a genuine way to make your brand stick to your customerâs mind for a long time.
If you received a complaint and you solved it by compensating the customer, make sure you do everything you can to deliver on that promise.Â
If your marketing campaign advertises that your products or services do this or that, it must live up to what is said in the campaign.
When transacting online, people always have their guards up. Theyâre very cautious about who theyâre transacting with and whether the business is a scam or legitimate.Â
With the number of scams that happen online daily, you canât really blame them. Thatâs why you must not go back on your word.
You donât want your business to be tagged as scammy. Thatâs the last thing you want to happen. You donât want false advertising ruining the reputation youâve built throughout the years.
These strategies above arenât just theories you learn from digital marketing courses. These are tried-and-tested ways to improve the current relationship between you and your customers.
As you might have noticed from what youâve read above, almost all of these improvement strategies are centered around your customers.Â
This just shows that if you want to increase the value of your CLV, you need to focus on your clients - make them feel special, let them have a great experience, show your gratitude and appreciation.
These small acts can eventually give massive results for your business.
Given the benefits of determining customer lifetime value, you must study this metric and improve it over time. Having a high number for this metric equates to increase royalty which ultimately boosts your companyâs revenue.
If you havenât tried out this metric, then now is a good time to start. Focusing on your customers can only bring positive things to your business. Since, after all, theyâre the ones who are fueling your business to continue running.
Apply the tips above and youâll see that the value of your customer will increase over time.Â