Focusing on customer retention and maximising Customer Lifetime Value (CLV) can be significantly more profitable than acquisition. But why is that the case? First of all, let's remind ourselves what CLV is and why it is important.
Customer Lifetime Value (CLV) is a metric that estimates the total revenue a business can expect to earn from a single customer account throughout the entire duration of their relationship with the company. This value helps businesses understand the worth of retaining customers over the long term, rather than focusing solely on individual transactions.
Why is customer lifetime value important?
Understanding CLV highlights the importance of customer retention. Acquiring new customers can be 5x to 25x times more expensive than retaining existing ones. Therefore, investing in retention strategies can greatly enhance profitability.
Existing customers are more likely to try new products and spend more than new customers. In fact, increasing customer retention rates by just 5% can increase profits by 25% to 95%.
Businesses can allocate resources more effectively, focusing on high-value customers and tailoring their efforts to maximise retention and upselling opportunities.
CLV helps in understanding the long-term profitability of different customer segments, guiding pricing, and promotional strategies.
Investors often look at CLV to gauge the future revenue potential of a business, especially in subscription-based or recurring revenue models.
Loyal customers often become brand advocates, recommending your products and services to others. Word-of-mouth referrals can drive new customer acquisition at a much lower cost.
Key components of CLV
Average Purchase Value (APV): This is the average amount a customer spends on each purchase.
Average Purchase Frequency Rate (APFR): This indicates how often a customer purchases over a specific period.
Customer Lifespan: This refers to the length of time a customer continues to purchase from the business.
This is how you can calculate the Customer Lifetime Value:
CLV=(APV×APFR)×Customer Lifespan
Example
Average Purchase Value (APV): £50
Average Purchase Frequency Rate (APFR): 4 times per year
Customer Lifespan: 5 years
Using the formula: CLV = (50x4)x5 = 1000.
So, the Customer Lifetime Value for this customer would be £1000.
How can you maximise CLV?
Personalised customer experience: We already explored how personalisation can lead to higher engagement and satisfaction. 80% of consumers are more likely to make a purchase when brands offer personalised experiences.
Loyalty programs: Implementing a well-designed loyalty program can significantly boost retention rates. According to a study by Bond, 77% of consumers say they are more likely to stay with a brand that has a loyalty program.
Proactive customer support: Providing exceptional customer service is crucial. Customers who have a positive service experience are 3.5x times more likely to repurchase and 5x times more likely to forgive a mistake.
Regular communication: Keep your customers engaged with regular, value-added communication. Whether it’s through newsletters, social media, or personalised offers, staying top-of-mind helps maintain strong relationships.
Upselling and cross-selling: Train your sales and marketing teams to identify opportunities for upselling and cross-selling. Existing customers are 50% more likely to try new products and spend 31% more compared to new customers.
Maximising CLV is not just about keeping customers longer; it’s about deepening relationships and increasing the value they bring over time. By focusing on retention and loyalty, businesses can achieve sustainable growth and a competitive edge.