Why You Must Measure Customer Lifetime Value
A successful business is built on the back of two indispensable strategies. The first is customer retention and the second is customer acquisition. Marketers often pay more attention to the latter because it is a common belief that acquiring new customers is more important than holding on to the ones that are already there. It goes without saying that this assumption is incorrect.
What Is Customer Lifetime Value?
Customer retention should not be ignored under any circumstances. It is an extremely important part of increasing the customer lifetime value (CLV) of a business. It can be defined as the present value of the future revenue that will be generated by each customer throughout the entire duration of their relationship with your company. In the simplest of words, CLV is a measure of how much a customer is worth to the business.
The Importance of Measuring CLV
There are a number of different methods that a marketer could resort to in order to measure the success of a marketing campaign. Most marketers prefer to compare conversion rates, website visits or sales with predetermined annual, quarterly or monthly targets.
These statistics are undoubtedly valuable and give marketing executives a general idea of how effective their efforts have been thus far. That being said, the numbers and figures can only be used to evaluate short term accomplishments. For assessing long term success, a marketer should spend time and money in understanding the right business metrics. Business metrics equip marketers with all the data that they need to plan operations which further the objectives of the company. In other words, they are essential to ensuring the growth of the business.
CLV is one of the most important business metrics that you can focus on, although it is criminally underrated. Finding the CLV for each prospect can help marketers understand whether they are targeting the right type of customers and if they are spending too much or too little money to acquire and retain these clients.
Analyzing value based segmentation is part and parcel of calculating retention rates. If this step is skipped, then a marketer will have an atrociously difficult time identifying the avenues of acquiring the best customers.
Customer Retention Is Generally Less Expensive
A marketing campaign that exhausts the budget of a company is deemed to be a failure regardless of how much customers are brought on board. At the end of the day, cost effectiveness is crucial to the survival of a business. Spending an extravagant amount of money on acquiring customers is not going to help the business stay afloat and remain competitive in the market.
When these factors are considered, it makes much more sense to focus on retaining customers as it is usually far less expensive than attracting new ones. Not much investment is required to keep an existing customer satisfied and craving for more.
This is not to say that customer acquisition is unimportant. Finding the right balance between the two is what elevates a business to the next level. Besides, boosting customer retention rates will automatically improve the customer lifetime value of a company. When that happens, each customer will be spending a lot more money on your products and services over a certain period of time.
How Is CLV Calculated?
Basic mathematics can be applied to figure out the CLV of a business. It is not possible to come up with an exact figure of the value all the time. Rough estimations are what most marketers rely on. While calculating CLV, the average customer’s purchase value is multiplied by the average number of orders per annum and the average customer retention rate.
This formula is used to calculate CLV when a sufficient amount of data is available. It is important to remember that the average customer retention rate should not be determined by arithmetic means. This is because the formulation gives you a number that is unlikely to meet your expectations. For instance, when you put together your most loyal customers with the ones that have made one-time purchases, you are going to receive a horribly underestimated figure for customer retention.
Since it is unusual for any industry to have identical customers, you should devise a formula that takes into account the fact that some customers are more loyal than others.
How Can You Improve Your Company’s CLV?
There are specific strategies that can be employed to enhance the CLV of a business. For example, marketers should focus on building long-term relationships with clients so that they do not switch to a different brand. Long term relationships are mainly built on the foundation of customer loyalty.
Another way marketers can improve CLV is by paying attention to the tactic of cross-selling. Selling your products in combinations will increase the average purchase value of a customer. Then again, some marketers choose to utilize a variety of platforms to deliver premium customer service. This works wonders when it comes to boosting the customer lifetime value.
Lastly, you could regularly promote appealing offers, rewards and incentives to keep the customers hooked to your brand. This gives your customers something to look forward to throughout the year and obligates them to remain loyal to your brand.
Eimear Flynn is the marketing manager of Powerpoint Engineering who runs ten ecommerce website in Ireland and the UK providing electrical safety products..