What determines the success of your business? Your eyes could be fixed only on the revenue you generate. But there is one important factor that gives you a full view of your success — the true value of your customers.
Customer Lifetime Value
Customer lifetime value (CLV) measures the projected revenue that any customer will generate in the course of their relationship with your business. CLV helps you determine how much money you should spend on customer acquisition based on the predicted value they will bring to your company.
CLV provides critical insights that will help you craft an effective digital marketing strategy. When creating a marketing plan, identifying who it is for is the critical first step that will support all your decisions. With CLV, you can target the most valuable customers and identify ways to keep them.
A simple way to calculate CLV is to minus the amount of money spent on acquiring a customer from the revenue you earn from that certain customer. For example, Client X has been your regular customer for 14 months and spends an average of $100 per month, you’ll earn $1,400 for this specific client.
Some have more variables and constants than others like in this case study on Starbucks that show in details how to calculate lifetime value.
More TLC = Higher CLV
It’s imperative to know your customers really well to keep your business in the game. Familiarize yourself with their likes and dislikes, the social media channel where they interact with you the most, their favorite products or services from your brand, among other substantial data.
It would be easier to plot your marketing strategies if you have enough information about your customers. What will you offer next that they will surely buy? How will you make them buy more often?
You attract new customers and make the existing ones stick with your brand for the longest time possible. That’s where CLV steps in — it helps you understand your customers and their purchasing behaviors. That’s one way to figure out if your techniques were effective and whether these customers are worth all the love you give or not.
Customers with the highest calculated CLV are your most valuable customers. They are the ones who repeatedly generates profit, which makes every penny spent on acquiring them worth it.
Repeat customers have a 65 percent chance of converting while prospective customers only have a 13 percent chance of making a purchase. Overtime, those who believe and trust your brand will become loyal customers. You don’t need over-the-top marketing to win their hearts, because loyal customers will stick with you as long as you’re giving them value.
When releasing a product, remember your regular paying customers. You know what their wants and needs are so instead of going crazy about launching a totally new product for your prospective customers why not come up with an upgraded version of your best customers’ favorite items?
Having a happy and satisfied customers should be the top priority for every business owner. If you make a customer happy, you need not put extra effort in convincing them to buy more items more often. This will result in a higher CLV, which gives you another valuable customer to take care of.
Role of CLV in your Digital Marketing Strategy
CLV helps you make better business decisions in building your overall marketing strategy. It also guides you through taking care of your high-value customers.
Boosting your CLV with well-planned marketing techniques will help you cut down your acquisition expenses. That also means earning more money for your business.
Instead of distributing a large chunk of your budget on an advertisement campaign, hoping to attract new customers, shift your focus to your current happy customers. Come up with a bright plan to let them realize how much they need your products so they won’t leave you.
On Customer Retention
We’ve talked about how important it is to know your customers. That’s the first step to figure out what you should be offering them. Get on their radar and slowly build a relationship.
Now to strengthen that relationship, engage them, give them quality products fit their lifestyle, and provide excellent customer service whenever they need you.
If you take care of this relationship, you can retain your best customers a lot easier. Customer retention is keeping your customers for a longer period. If they continue to support your business by purchasing regularly, both your customer retention rate and CLV will increase.
There are many ways to boost your customer retention rate. Below are some common marketing strategies you are probably doing in your business now, unaware of how they’re giving your CLV an extra push.
Social media — everyone’s favorite channel to connect with their patronized brands. In which platform are you most engaged with your audience? How does it help your CLV?
Whether it be Facebook, Twitter, or Instagram, the platform where most of your customers re is your avenue to build a stronger relationship with them. Remind them of the connection you have between you by being consistent in delivering high-quality and relevant content at the right moment.
Personalized emails don’t land in the junk folder. The benefits of knowing your customers also branch out to your email marketing campaigns. If you send them email content they care about, you do not only connect with your customers, but you can also drive 18 times more revenue than generic emails.
One of the most direct and effective marketing strategies to thank your customers for their loyalty is through a rewards card. Earning points, no matter how small, could sometimes feel like a mini-challenge for your customers. They know there’s a purchase involved but in the long run, those small points will grow bigger and the reward sweeter.
Engaging with your customers on their personal posts on social media makes them feel special. A little attention from you reminds them of how connected they are to your brand, which also gives them a sense of belongingness.
User-generated content is the most personal way you can engage with your customers. Like or comment when they tag you in their posts. Remember, a happy customer means a higher CLV. Encourage them to upload photos or videos showcasing your product and see for yourself the goodness of UGC.
On Customer Acquisition
How much budget should you set for acquiring customers? Once you’ve calculated the value of each customer, you can become smarter in your budget allotment and make sure no penny will ever go to waste. Why would you spend $10,000 in gaining new customers if your average CLV is $8,000?
Where and how were you able to find your most valuable customers? You would definitely want to implement the strategies you did to get new ones from those channels again.
A study conducted by Bain & Company Inc. shows it’s cheaper to keep an existing customer than to gain a new one. CLV gives you a clear view of the customers that are worth keeping. At any given time, you would opt to take care of regular ones than those who made their last purchase six months ago.
The best way to retain your loyal clients is to keep them satisfied. Doing this will boost their lifetime value so it’s a win-win situation for you and your customers.
Case Study: Netflix CLV
This Netflix case study shows how the company maximized their revenue by optimizing the lifetime value of their customers.
Tracking your customer behavior helps you discover what pushes them to engage more and why. By knowing these things, it would be easier for you to give them what would make them happy. Netflix did this by adding features on their website that gave them insights about their subscribers’ viewing patterns.
If they find reasons to keep their relationship with your business, they will continue to pay for your products or services for a longer period.
Once you have your CLV figures calculated, you can continue spending money on marketing, aware that those amounts won’t go down the drain. At the time this case study was done, Netflix paid affiliates $16 for every new subscriber they brought in. They also spent $2 per click on their Google AdWords campaign.
But it’s not enough that you know your CLV or what makes some customers stay longer compared to others. You should also identify the lifetime value of customers coming from different channels to know how much you can spend on acquiring from those channels.
Customer lifetime value is a significant metric that most business owners do not give much attention to. No matter how many sleepless nights you’ve spent on your digital marketing plan if it’s not focused on your customers and their value, don’t expect the return to be rewarding.
Get to know your customers like a friend or even a family member. That way, you will always be motivated to give them your best in everything.
Identify the group of customers worth wooing. If they realize they need you in their life for the months or years to come, they won’t cut ties with you.
How about you? What other techniques do you do to take care of your best customers?
Ryan Del Villar is a Digital Marketing Specialist at the Bradford based Digital Agency Harrison Mann. Being in the digital marketing field for 7 years now, he enjoys keeping up to date with the latest in all things digital and search. As a silent type, Ryan expresses plenty of his thoughts through writing.