How to Improve Your Company’s Customer Lifetime Value

An existing customer is six to seven times more likely to purchase products from a business than a new customer. This makes customer retention one of the cornerstones of any contemporary business’s strategy. 

Customer lifetime value is a metric that helps businesses plan ahead and improve customer retention. But how do you define customer lifetime value

More importantly, how to calculate lifetime value of a customer?

Understanding the answers to these questions provides perspective into how lifetime customer value can be optimized and increased.

We discuss everything you need to know about the customer lifetime value model for business growth in this post.

What is Customer Lifetime Value?

Customer Lifetime Value (CLV or CLTV) is a measure of the average customer’s total purchase value throughout their time doing business with a brand. 

In simple words, we can define customer lifetime value as a measure of the total revenue a customer generates for the business.

With new businesses launching at an astronomical rate, competition is cutthroat, and customer expectations have never been higher. More pertinently, 60% of modern businesses fail within three years.

Understanding the customer lifetime value formula is the first step to taking full advantage of an existing customer base. 

Customer lifetime value is the product of the following values:

  1. Average purchase cost
  2. Average number of purchases annually
  3. Average lifetime of the customer in years

Let’s assume a mechanic repairs bikes for $250. If a biker owns two bikes and brings them into the garage twice a year, assuming that the biker will stay a customer for 10 years, here is how to calculate customer lifetime value:

Customer Lifetime Value = $250 (purchase cost) * 4 (2 bikes, twice a year) * 10 (average customer lifetime) = $40,000

When a business establishes how much it can expect to earn from a customer, creating sales forecasts and working out how to improve CLV becomes easier. 

How to Improve Your Company’s Customer Lifetime Value

Here are eight ways to improve lifetime customer value:

#1 Loyalty Programs

Offering an easy-to-access customer loyalty program is an excellent way to drive customers to shop more frequently.

The best part? There is no hard-and-fast method of implementing a loyalty program. Businesses offer them in all shapes and forms, with the most popular approaches being:

  • Point programs: Customers earn points on their purchases and can use them to claim benefits, buy products, and avail discounts. HSBC’s rewards program offers points when credit card users make purchases. The customers can redeem these points for purchasing appliances, airline miles, clothes, and a wide range of other products and services.
HSBC Credit Card Rewards Program
  • Tiered programs: These programs involve businesses implementing loyalty tiers. Customers enjoy the perks of higher tiers as they spend more. Most frequent-flyer programs are tiered programs, with the Delta SkyMiles Medallion elite membership program being an excellent example. 
Delta SkyMiles Medallion Program
  • Paid programs: As the name indicates, customers pay a fee to access discounts and deals. Amazon Prime is the perfect example of a paid program.

Image: Amazon-Prime.png

  • Partner programs: In these programs, a business’s partner companies offer benefits to customers. If you own an Apple product, you could visit Best Buy to repair it, owing to their partner program. Best Buy is also an official reseller for Apple.
Best Buy Apple Reseller

The main idea of a loyalty program is to reward customers every time they buy your products or avail of your services. Besides encouraging them to buy more frequently, a well-executed loyalty program can also increase the average order size.

Reports by Statista indicate that Amazon Prime members spend $1,400 on Amazon annually, whereas non-Prime users spend $600. A well-crafted loyalty program – even a paid one – can help businesses improve CLV and retention.

#2 Email Marketing

Per Campaign Monitor’s 2016 annual report, email marketing can offer an ROI of up to 4400%. Additionally, customers enjoy receiving offers and discounts via email, especially when the deals are personalized. 

Discount Email Example

However, it is vital that businesses do not limit their email communication to promotion. Connecting with customers and building a relationship with them is key to increasing CLV.

Sharing helpful content related to your products and services is an invaluable method of improving your brand image. 

Tips Email Example

It’s also important to send event-specific emails and birthday wishes. 

Birthday Email Example

Staying visible to customers is key to optimizing purchase frequency – the more customers hear from you, the more likely they are to buy.

#3 Up-selling and Cross-selling 

Sales teams worldwide use cross-selling and up-selling to improve customer lifetime value. The classic techniques are most effective for existing customers since they understand the business and your products or services. 

Further, they have parted ways with their money before buying your product or service. This makes it one of the easier methods to improve customer lifetime value on this list. 

But marketing teams must tread carefully since coming across as pushy can turn customers away. To increase the odds of success, marketing teams need to time it correctly. 

Amazon pulls off both of these tactics masterfully.

Amazon Up and Cross Sell Example

The takeaway from Amazon’s approach is simple – map out the product’s lifecycle and offer products or services they can buy next when the customers are at the end of the sales funnel.

#4 Giveaways

Giving away products or services for free is one of the most effective sales tactics any business can employ. Customers love getting something for nothing, and it helps improve reach, engagement, and brand awareness.

Giveaway Example

Some businesses go the extra mile and build giveaways for market testing purposes. The winners of the giveaway give valuable feedback about the product, feeling valued by the business in the process. 

#5 Referral Program

Whether running a brick-and-mortar store or an eCommerce business, setting up a referral program should be a breeze. 

These programs allow customers to get a commission, discounts, or other benefits when they recommend a product or service to someone and they convert.

It is a highly-effective low-cost method to increase customer lifetime value. Dropbox doubled the size of its user base every three months between 2008 and 2010 through its referral program. It’s one of the most famous examples of referral marketing.

Dropbox Referral Program

New and seasoned marketers both understand the power of word-of-mouth marketing. The thinking is that when someone recommends a product or service, they do it because it’s worth their money. 

Creating a positive brand image and offering an easy-to-access referral program is the right way to go for any business that wants to improve lifetime customer value.

#6 Improve Customer Experience

There are several ways to improve a customer’s experience with a brand:

High-End Customer Service

Providing quality customer service is a sure-fire way to improve customer retention. If a business’s service is below average, customers defect to competitors even if your product is better. 

A 2021 report suggests that 80% of consumers switch brands due to poor customer experience, and 43% are likely to switch brands after a single negative customer service experience.

Spending time and resources to offer good customer service will allow you to turn customers into loyal, long-term clients.  

Omni-Channel Support

Contemporary businesses understand that being active across several channels is the only way to remain visible to new and existing customers. Cross-channel interactions are the norm and significantly impact customer retention and brand image.

It’s also important to remember that nearly two-thirds of all adults switch between two or more devices throughout the day. Consumers have come to expect brands to have several communication channels for their convenience.

For this reason, it’s vital to analyze which channels your customers use the most. You may find that your consumers use Twitter the most while you offer email support. After determining where your customers are, equip your support team to use those channels, and ensure every channel has a dedicated team.

Social Media Responses

When customers reach out to a business on social media for any reason, they expect a fast response. Four out of five consumers expect a response from support teams within 24 hours, and Twitter users tend to expect responses in under an hour. 

Social media has allowed consumers unlimited scrutiny of a business’s response time. If a brand fails to meet the consumers’ expectations, they share their dissatisfaction with the brand with other consumers.

Before social media became mainstream, consumers would complain to their family and maybe their friends and co-workers. Now, anybody can see these conversations, increasing the stakes.

Having at least one member tracking social media interactions and prioritizing those complaints is a good start.

You may also read: What Is Social Proof in Marketing : Importance and Examples

24/7 Support

Both business buyers and customers expect fast answers to their questions and quick resolutions to their support requests. Offering round-the-clock customer support is expensive, but it’s worth it for growing businesses.

Providing 24/7 support is not possible for many businesses, but it’s best to equip the support team to answer customer requests as soon as possible. The expectations of a fast response are higher when support is available 24/7, so having a well-trained and responsive support team is important for all businesses.

Keep the Knowledge Base Updated

Knowledge bases are an important aspect of a business’s support infrastructure. Nearly every successful business today offers access to tutorials, video guides, articles, and other documentation to help consumers learn about its product or service.

Putting together easy-to-understand content for your business will take time and resources, but it is one of the best ways to increase customer retention.

Research reveals around 91% of consumers would rather use a Knowledge Base to solve their problems, and 70% of consumers prefer using a business’s website to solve their problems over contacting the support team over email or phone.

Having a comprehensive knowledge base allows some breathing room for the support team. If the solution to a problem is already documented, an automated bot can redirect customers to the relevant article or documentation.

Chatbots are becoming ubiquitous worldwide, helping businesses reduce call, chat, and email support requests by up to 70%.

Knowledge bases often offer faster resolutions when configured correctly than other customer support methods. According to Forbes, 70% of millennials had a positive experience with chatbots, making it a viable solution for businesses across industries. 

Live Chat

Although the technology has been around since the 70s, live chat was considered nice until about a decade ago. Fast response times are critical to customers and business buyers, with about four in every five customers resorting to live chat for quick resolutions.

Since live chat allows for remote work, putting a team together has become easier for businesses.

#7 Collect Actionable Feedback

Growing a brand without gauging the customer’s perception of the brand is impossible. Traditionally, gathering feedback has been a passive activity for businesses. But modern businesses can easily collect detailed and actionable feedback to navigate their strategy.

Your customers can tell you which aspects of the business fail to meet expectations, and improving internal processes can help improve customer retention. A happy customer is a loyal customer; therefore, prioritizing various aspects of business according to feedback can improve customer lifetime value

The approach also enables you to scale down tactics that don’t seem to be working. Real data about how likely your existing customers will recommend your product or service and why or why not will allow you to see the direction the business needs to grow in.

Storing the feedback in one place and sharing it across departments is the right way to go. Some businesses have a dedicated team to monitor customer sentiment online.

Sending out customer satisfaction surveys is a nice way to capture customer sentiment. These surveys are of different types, but many businesses prefer the NPS survey. 

The Net Promoter Score survey is a one-question survey that enquires how likely the customer is to recommend the product or service to a friend or colleague on a scale of 0 to 10.

Image: NPS-Survey-Example.png

Depending on the feedback provided, the respondents are categorized into Promoters (9 and 10 scores), Passives (7 and 8 scores), and Detractors (0 to 6 scores).

Calculating the NPS is as simple as subtracting the percentage of detractors from the percentage of promoters. The score will give you an accurate assessment of customer happiness. 

You can also send follow-up questions or ask for specific feedback in a text box when you send the survey to understand what customers like or dislike about your business. You can then gauge what improvements your business needs to make.

Higher NPS improves customer lifetime value since happier customers stay with businesses longer and shop more. Dedicating time and resources to improve the NPS is worth it since it will help keep your churn rate low while expanding your client base.

Businesses can use NPS software to collect and organize customer feedback. These tools help make managing customers easier for the support team.

#8 Incentivize Annual Billing Cycles

If your business sells recurring products or services (like supplements or web hosting), the customer lifetime value is dictated by the total amount of time your customers continue to pay.

Customers that pay only for a month or two for your offering drive very little income, rarely covering the customer acquisition cost, let alone make a profit. Businesses need customers that stick to the product to drive predictable revenue consistently.

For instance, if your customers stick with you for under 12 months, incentivizing switching to an annual billing cycle is best. Many web hosting businesses offer annual plans at much more affordable prices. A2 Hosting offers basic hosting for three years at a 72% discount. 

Image: A2-Hosting-Annual-Billing-Incentive-Example.png

Another way of incentivizing annual billing cycles is to offer a month or two months of usage for free.

Since the customers commit to a year of use, the churn rate is reduced, and the CLV improves. 

The prepaid amount provides you the capital to reinvest into product development. Additionally, annual billing cycles allow you to forecast revenue, aiding decision-making.

Sometimes, consumers forget to renew their subscriptions. To prevent your customers from getting a chargeback, contact them over email or phone to remind them of the renewal deadline.