Blog Customer Experience

What is Customer Lifetime Value and Why does it Matter

Mathew Maniyamkott

Mathew Maniyamkott

10 min read

As a part of the customer experience program, Customer Lifetime Value (CLV) is one of the key metrics that need to be tracked. It is the measurement of the value a customer brings to your company after the first purchase till the end. For starters, it helps you gauge a cost per acquisition that is reasonable. This is an important metric as it keeps you aware of how valuable an already existing customer is and ensure that you take steps to keep them satisfied.

If the cost of acquiring a customer for a manufacturing business is $500 and if the Customer Lifetime Value is the same as an average customer there, then the firm is losing money. Knowing your customer lifetime value helps to draft out a strategy easily. This also ensures that you are posting profits by making your existing customers stay and close more leads.

Why is Customer Lifetime Value important for your business?

When you calculate the Customer Lifetime Value, it opens you up to a lot of possibilities. It gives you a brazen review of where you could be wrong in terms of your business strategy. It will help you understand why a customer’s lifetime value is only $X over the course of their relationship with you. You will think about ways to increase your customer’s spend. It will help you open your mind to cross-selling and up-selling your offerings by introducing more products that you might have never thought the customer would have wanted.

Customer Lifetime Value helps in drafting out a strategy to ensure that you are posting profits by making your existing customers stay and close more leads.

Methods to calculate the company’s Customer Lifetime Value

Cohort Analysis:

A cohort is a group of customers who share specific characteristics with each other making it easy for a business to segment them for targeted marketing. Instead of concentrating on individual users, companies can understand the estimate of a certain kind of customer and guess their Customer Lifetime Value.

Average Revenue Per User (ARPU):

Another method that is easy to calculate the Customer Lifetime Value is by dividing the total revenue by the number of months since a customer became a paying one. The value you get is multiplied by 12 or 24 to get a one or two-year CLV. This does not take customer behavior, company strategy, and related things into account.

Individual Customer Lifetime Value:

If you are a company that is not interested in calculating Customer Lifetime Value based on variables like channel, platform, source, landing page, and type of customer, you can still attempt to measure it. Bigger companies find it difficult to measure Customer Lifetime Value as there are a lot of factors riding on the number.

If you have data from all the areas of the organization integrated, then here is an easier way to calculate CLV:

  1. Identify the interaction point where the lead gets converted into a customer
  2. Record the customer journey at each touchpoint.
  3. Measure revenue created at each touchpoint.
  4. Add all of these to get the lifetime value of the customer.

The simplest formula for Customer Lifetime Value that anyone with technical knowledge can understand is this:

CLV = Customer’ spend – Cost of acquiring – the cost of marketing – the cost of serving the customer.

The Customer Lifetime Value of a customer is not found out to increase the number point-blank. It helps you build customer acquisition strategies as well as craft a roadmap for customer retention. The way you calculate your Customer Lifetime Value depends on your business model. It is easier to calculate your CLV if you have only one product and there is a specific set of channels in which you spend money.

Why know your Customer Lifetime Value?

Calculating the Customer Lifetime Value helps you make a lot of business decisions which can affect it positively. Knowing the value helps you do the following:

  1. Find out who your most profitable clients are
  2. How much do you spend to acquire your customers?
  3. What do customers with the highest Customer Lifetime Value want?
  4. How to increase Customer Lifetime Value and when to put customers on a retention plan?

Taking these decisions can create a lot of positive change in your business. When you know your customer’s lifetime value, you can get started on improving the number. It will help you concentrate on improving your existing relationship with your customers. You will be motivated to put more effort into email marketing, SMS marketing, social media marketing, paid ads, content marketing and so on.

Customer Lifetime Value gives you a strong indication of the company’s success in the long term. It tells you how well you are going to perform in the future. Do you have enough ammunition to stick your neck out for the long haul or do you need to make drastic changes to survive and thrive?

What should your Customer Lifetime Value be?

There is no hard and fast rule about your Customer Lifetime Value, it completely depends on the data that you have. If your Customer Lifetime Value is low, then it does not mean that you should work towards increasing it. As long as the cost of customer acquisition is significantly lower than the customer lifetime value, it is perfectly all right. Trying to reduce your customer acquisition cost should not come at the cost of marketing and content efforts.

Increase your Customer Lifetime Value

Now that you know how Customer Lifetime Value impacts your business and how to calculate it, here are 8 ways you can improve the number.

#1 Build complementary products

If you have just one product, there is not much to go by for the customer. They might want to get a few more stuff and will head out to your competitor who sells more products. If you sell an email marketing tool, then add an automation factor or a calling feature too, these are the kind of upsells that you can make to increase the Customer Lifetime Value.

The extra products/services that you plan to offer should be complementary. If you have a company that makes high-end mobile apps for businesses, it makes sense to add digital marketing services too as your clients will need it too. It would be ridiculous if you plan to sell insurance along with it, no one would be interested.

You could also be selling one fantastic product that people go gaga over and the accompanying complimentary aspect to the product can be maintenance charges for support.

#2 Customer Satisfaction

The best part about satisfying customers as a principle is that it is not an add-on, it is a must without which your business will collapse. In this digital age, all it takes is a scathing review to get you to shut shop. It is pivotal that you invest in customer service programs. Companies that are hell-bent on delivering great service to their customers are the ones that thrive well in the harsh world of business. An increased customer satisfaction level is directly related to how well your business will be successful.

There are so many strategies that you can implement to keep your customers satisfied. Get the help of executives who have worked on customer success programs who will be able to give you better direction on how you can make changes in your present system so that more customers are enthused to keep coming back to you.

The best part about satisfying customers as a principle is that it is not an add-on, it is a must without which your business will collapse.

Customers are highly conscious about the service they get these days, they do not want to take the hassle of a business that treats them poorly especially because they have a lot of options. Ask questions to them using an online survey tool like SurveySparrow on how you can better their experience.

#3 Have a smooth onboarding process:

In this age, customers expect that as soon as they make the payment, they want the product up and running for them with minimal instructions required from anyone else. Your customer onboarding process should be as smooth as possible without delivering an irritating experience to the customer.

You must put together an onboarding process that makes them comfortable and lets them engage with your business multiple times a day without any hassle. Imagine a customer having to log in each time they want to visit your business to complete a transaction? How difficult would that be? Even if they are highly satisfied with the product, they will start looking for an alternative as they do not want to put themselves through this process.

#4 Provide high value

Always make it a point that each time your customers see an email or come across any message from you, it is highly valuable. If you are a business that is into providing accounting services, share information with your customers that helps them in their business. If your clientele is of accounting businesses but you provide them with an ancillary service, then you can provide them with information that combines your service plus their business. Do you get the drift?

As long as anything that keeps them occupied with your content, you are winning. Every interaction with you should be fruitful to your customers, otherwise, they will stop expecting much from you and it will not help your case.

If you have customers deeper into the middle of the funnel, then offer content that is much more customized according to their needs. Map your customer’s journey, identify the various interaction points, use this data to send highly targeted campaigns which will increase the conversion rate by a huge margin. It will also help you understand how to provide more value for your customers.

#5 Offer top-level support

As a business with different varieties of clientele, it is important that you offer them various channels in which they can reach out to you. If the only option you give to your customers is email support, you might have to face the wrath of a lot of disgruntled customers who might have wanted different options.

You need to offer support in areas where they are usually visible. If your customers are available on Twitter and Whatsapp as much as on emails, then don’t shy away from offering support there as well. Ensure that your support team is well trained to handle complaints on these platforms as well.

If it is under your budget, make it a point to offer 24*7 support to your customers. Customers also expect round-the-clock support these days and you get to score brownie points if you offer customer resolution immediately. Train your team so that they treat your customers well and handle their complaints with care and respect.

Go a step ahead and offer live chat support for your customers. Client-company communication that happens live on the website is not only a great way to brand your business but it helps with an instant resolution of your customer’s issue. You can even have a completely remote team that handles live chat support for your business. Visitors who live chat with you on your website are considered 4.5 times more worth than those who use other platforms.

#6 Use Social Media

Our advice on using social media is not just about using it as one more platform to offer customer support, but it is much more than that. Monitor conversations on social media that have any mention of your brand or your competitor’s. Also, customers expect a much faster response if they ever message you on social media, so be prepared for that as well.

4. Ignoring your customer’s complaints on social media will make them leave with a bad taste.

Prioritize social media by forming a social media team who will not only handle your posts here but also respond to comments. Including the complaints that you receive on social media on a priority basis is one of the first things that you should do as ignoring them will make your customers leave with a bad taste.

#7 Create a knowledge base

Creating FAQs, ebooks, case studies, testimonials, video guides, marketing collaterals, articles, blog posts and more are a great source of addition for your marketing as well as helping your prospects and customers with information that will help them make buying decisions. 70% of customers would rather get all the information they want about you from their end instead of having to rely on customer support or email interactions. This is where this knowledge base makes sense for your business to take time and effort to develop. It is said that by 2020, customers will be able to manage 85% of the relationship with a business without any human interaction.

Having a repository of knowledge ready will take the burden off your customer service team as well since they would only require to answer fewer queries helping them save time on mundane inquiries and focus on tasks that have higher returns like improving customer relationships.

#8 Feedback

Collecting feedback from your customers is one of the biggest mistakes that a lot of businesses do not do and pay a steep price for it. Knowing what your customers want will make you take steps that will benefit your enterprise. Wanting to grow your business without understanding how your present offerings can be bettered is a problem because you will not know what to improve. But the answer to the same is right in front of you- your customers.

Ask questions to your customers with the help of online survey tools that will allow you to present them in highly beautiful forms. A tool like SurveySparrow ensures that the questionnaire reads as if it were a conversation ensuring lesser drop off rates in the middle of a survey. There are a lot of questions that you can ask your customers on topics that you want to know more of.

The questions could be about how your business has helped them, areas where you need to improve, any recommendations and so on. There is no limit to the type of question that you can ask. You can even calculate your NPS score which shows how likely they are to recommend your product to their friends.

A high NPS score helps with increasing your Customer Lifetime Value as it is directly proportional to how happy your customers are with your product. Focus on increasing your customer’s satisfaction and the Customer Lifetime Value score will increase thus reducing the customer attrition rate as well.

Use the feedback to find the most pressing problems for your customers, make sure that you take immediate steps to mitigate the problem. Once you resolve the biggest issue, you can take care of the other problems as well one-by-one. This way, the existing customers will be more happy with the services you provide and your target audience will keep hearing about how hard you try to keep your customers happy and they will convert too.

Conclusion

You can build a positive, cash-flow and successful business by using this metric. The strategies that you use to retain customers and acquire new customers based on the Customer Lifetime Value metric can go a long way in helping your bottom line. When you keep ‘wowing your customers, they will become advocates for your business and will even offer you repeat business as well as refer you to their peers. Invest your resources in keeping your present customers happy, satisfied and fulfilled.

Taking small steps in increasing your customer experience will help them feel good as a customer. Let your principle as a business be underpromising and overdelivering for your customers. Long-time customers want to feel appreciated, if they don’t, they will soon leave you for a newer competitor who makes them feel valued.

Customer Lifetime Value is a great metric to keep monitoring religiously.Understanding how it impacts your business can be a turning point for your business if you had ignored it all along. Working on the insights from the metric will help you establish a good relationship with the customer as well as persuade you to think about increasing loyalty.

 

Mathew Maniyamkott
Mathew Maniyamkott

Guest Blogger at SurveySparrow

Regular contributor to various magazines. Passionate about entrepreneurship, startups, marketing, and productivity.

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