What is customer lifetime value and why does it matter? Customer lifetime value (CLV), also known as lifetime value (LTV), is the monetary value of a customer over the course of the customer-business relationship.
Customer lifetime value is one of the most significant metrics for your business. Not only does it measure the value of a customer, but it also provides keen insight into your business’s direction from a sales and marketing perspective.
For example, an average LTV for an online clothing boutique is $50, and the cost to acquire a new customer (CAC) using digital marketing is $60. This clothing boutique would be losing money because it wouldn’t be making enough on its existing customers to spend acquiring new ones.
It always costs less to retain existing customers than to acquire new ones. So, finding ways to increase the value of your existing customer is the best way to drive growth.
The ability to calculate customer lifetime value is crucial because it helps you develop the right marketing strategies and tactics to increase profit margins. It also positions you to be able to provide a better customer experience, improve the quality of your products or services, and maximize value on both ends.
Calculating customer lifetime value
Here’s how to calculate your customer lifetime value:
Customer Lifetime Value = Customer value x Average lifetime value of a customer
Let’s determine the value of a woman who regularly shops at our fictional online clothing boutique:
$350 (per outfit) x 12 (visits per year) = $4,200 each year
A customer spending over $4,000 a year with your business has proven product market fit, which makes it easier to create effective marketing campaigns around your ideal client. Having loyal customers with repeat orders helps bring steady cash flow into the business.
Why does CLV matter for your business?
You can’t improve on what you don’t measure. Your customer lifetime value is one of the most important metrics to determine the sustainability of your business. On the sales side, it allows for better forecasting and allows management to make informed decisions about inventory, production, staffing, and other operating costs.
The customer lifetime value can help improve marketing decisions in the following areas:
- Customer segmentation
- Customer loyalty
- Focus on sales
- Increased revenue over time
Let’s dive deeper into each of these factors.
It improves customer segmentation
Keeping existing customers engaged by promoting content related to previously purchased products is a great way to increase the number of goods purchased, as well as the time a customer spends with the brand. This is also known as cross-selling. Since you’re marketing to existing customers or subscribers, you don’t have to worry about the costs of acquiring new customers.
To do so effectively, it is important to understand your customers’ journey when they purchase your products. Knowing how they navigate your website, their most viewed pages, and their visit duration, are all early signs of interest. Moreover, when a customer signs up for your email list or makes a purchase, it gives you an opportunity to leverage customer segmentation. Customer segmentation is the process of categorizing customers based on shared characteristics. This allows you to customize your marketing efforts by addressing pain points or providing complementary items.
How Gymshark uses purchase data and details to upsell
Let’s take a look at gym fave Gymshark’s purchase journey to see how the brand uses purchase data and details to upsell other products post-purchase. Upsell emails generally promote different items regularly after the original purchase. They can also be more targeted because the buyers have purchased and browsed the site and, through purchasing, have provided additional information.
First, we notice right off the bat that most of the emails sent after the purchase of our Gymshark order cater to male buyers. This makes sense given the information we’ve provided. This segmentation could have also been determined through browsing history on the website. Six days after purchasing a Gymshark keychain, this email is sent out regarding the other clothing products the brand offers as well as its community:
It costs around five times less to market to existing customers than to acquire new ones. Including purchase upsell emails promoting related products or browse abandonment emails after initial purchase is a great way to engage customers long term. Get more upsell email inspiration from our advanced email search feature.
It boosts customer loyalty
Using your customer lifetime value data is a great way to boost customer loyalty. According to Outbound Engine, loyal customers are five times as likely to repurchase, four times as likely to refer a friend, and seven times as likely to try a new offering than new customers. Here are some tips on improving customer loyalty:
- Create a community or a brand ambassador program
- Remember special dates (i.e., birthdays, anniversaries with your brand, etc.). Offer gifts accordingly.
- Follow up promptly (i.e., with a phone call after solving a problem)
Email marketing is one of the best ways to stay in touch with current customers from and deliver time-sensitive communications about abandoned carts, discounts, or new products. Plus, delivering these timely, personalized experiences can drastically increase your sales. Research shows emotionally connected customers have a 306 percent higher lifetime value and stay with a brand for an average of five years.
In the example below, Ulta sends a personalized message to customers on their birthday to urge them to visit stores to receive their free gift. In addition, the customer has a chance to double their account points during their birthday month.
In this email example from Domino’s, the brand immediately captures the customer’s attention and loyalty by making them feel as though they are part of a community. The subject line used here is “Welcome to the pizza life.”
Additional notable copy examples include, “You’re In The DomiKnow,” and “You’re Becoming a Domino’s Know-It-All.” Domino’s use of emojis and clever language in their marketing creates a sense of exclusivity and heightens the customer’s engagement.
It puts the focus on sales
Understanding your customer lifetime value will help determine your pricing and sales strategy for your target audience. Pricing can be challenging, including whether it should be low, high, discount, bundle, or subscription. All of them are viable options, but you have to determine what works best for your business model and supports your LTV data. Once you find the right price point, it is easier to drive repeat sales and know when to make incremental changes. The most important thing is that you’re able to reflect your product’s value accurately while making a profit.
It increases revenue over time
Customer lifetime value demonstrates a correlation between your business financials and marketing budget. The goal is to encourage more frequent orders or larger orders from long-term customers. Your business should be able to identify upsells and cross-sell opportunities. Upsells consist of selling more features or product extensions to existing customers. Cross-selling means selling other related products that match your core product.
Upsells and cross-sells correlate with customer lifetime value by determining:
- The exact amount of your average customer over time
- The types of products, service, customers with the highest LTV
- Which products/services have the highest profitability
- Who are your most profitable types of clients
If you’re in the market for a watch, Original Grain does a great job of streamlining the upsell and cross-sell. They understand the buyer wants a watch and offer engraving, an upsell for an additional $39. Furthermore, the rings and accessories are great complements to the watch, which lead to a higher order value when purchased together.
Tips to increase customer lifetime value
As a marketer, I’m sure you are working on multiple strategies to acquire and retain customers. To help you prioritize, here are some proven tips to help you improve your customer lifetime value.
Prioritize the customer’s experience
Everyone is busy, and retaining customer attention is critical once the customer is on your site and considering making a purchase. Therefore, it is essential to look at the customer’s experience from a 360-degree point of view. Consider your website navigation and social media engagement, as well as the return process or customer service in general. Great customer service leads to customer satisfaction, which means a longer relationship with a customer.
Don’t ignore social media
One of the first places you get your customers’ attention is through social media. Social media channels such as Instagram, TikTok, and YouTube are viable channels to receive traffic, engagement, and advertisement.
In addition, your prospects and customers may have highly engaged platforms where they are constantly displaying, tagging, and discussing products. This may show up in the form of product placement, sponsorship, or a detailed product review. If you come across a post highlighting your products on your timeline, make sure you show your appreciation—it usually goes a long way.
Implement omnichannel support
Omnichannel support allows you to provide customer support across many different channels. According to Instapage, over one million people view tweets about customer service every week and 80 percent of the tweets are negative.
Different customers have different preferences. Regardless of the channel, it is imperative that your staff is well-trained and responsive to issues. Create a resource library that team members can refer to when necessary. Identify keywords that can be monitored on social media. Acknowledge all public complaints and inquiries, but continue the conversation in private via SMS customer service in order to find the best solution for the customer.
Make the return process easy
We all want an easy shopping experience, so shouldn’t returning a product be the same way? A painless return process will increase the chance of a customer making a future purchase. This is one of the reasons why Amazon is so popular.
Even if the customer returns an item, this is a good opportunity to receive feedback regarding their purchase and return. It’s possible that you can redirect the customer to a better fit whether it is lower or higher in price.
Keep your ideal customers in mind
Early on, we learn to formulate our ideal buyer personas for our business. Understanding customer lifetime value allows you to go deeper into understanding customer behavior and purchasing power. You may have clients that spend $50, $500, or $5,000. Their purchasing power will allow you to form a comprehensive customer profile with similar characteristics. This will help with identifying the right target methods in acquisition strategies, product development, selling, and retention.
Pay close attention to unhappy customers
Usually, when we segment our customers, we focus on the group that is buying because we see the immediate value. After all, they are keeping our business going. Let’s not forget about our unhappy customers or abandoned carts. By reviewing the data we can find ways to ways to re-engage lost customers with a win-back email campaign. Approximately 45 percent of customers who open a win-back email will also open future emails. Some go-to tips for win-back campaigns include creating a sense of urgency, offering a gift, or even providing free shipping.
Having a strong and enticing subject line to grab the reader’s attention is important. In this example, Quip uses: “You’re sooo close. Time to own your dental destiny.” It piques the curiosity of the reader to open the email and give them another chance. Second, it places the reader in charge, encouraging them to own their dental destiny. Third, it respects the reader’s time by mentioning just a few clicks. The prospect has completed their research and can simply finish making the purchase in a few clicks. Lastly, Quip informs the reader that they have over 25,000 trusted reviews so you’re in good company. This is a simple and effective win-back email.
Create a rewards program
Whether you’re dealing with a first-time or a loyal customer, a rewards program encourages repeat purchases. According to Invesp, 49 percent of customers agree to spend more after joining a loyalty program. A good rewards program builds trust, incentivizes the customers, and leads to word-of-mouth marketing that can drive down the cost to acquire a new customer.
Southwest Airlines has a generous rewards program. In this example, they’re speaking to a new customer with zero points. Southwest cross-sells with a credit card promotion that starts off offering 50,000 points and continues to demonstrate how to earn unlimited points using your credit card to purchase airline tickets, rideshare, and pay bills. Members can also receive an additional 3,000 points on their anniversary date, which is a good example of a personalized user experience driven by simple first-party data. More importantly, the points do not expire which gives you a chance to redeem your points at any time and further enhances the customer lifetime value.
Invest in product education
Product education is a solid way to have customers invest their time with your company prior to purchasing. Providing valuable content for free allows the customer to make an informed decision and differentiates you from your competitors. It is important to meet your potential customers where they are. Podcasts, blogs, and other forms of paid or earned media are good examples of product education. Also, including education provides a break from the customer receiving sales offers.
Optimize your onboarding process
Customer onboarding is a great way to establish trust, build a positive customer experience, and nurture a long-lasting customer relationship. Depending on the type of business, the onboarding process may look a variety of different ways but the point remains: Providing customers with valuable information up-front, making them feel welcome, and reducing any barriers to entry when it comes to the sales process will only encourage them to stay loyal longer and increase customer lifetime value.
Increase your customer lifetime value by learning from top ecommerce retailers
The customer lifetime value metric is often overlooked, but it’s crucial to the success of your business. Understanding it not only helps the marketing team, but it helps the sales and leadership team make more informed decisions. The ultimate goal is to leverage the best retention strategies and tactics to nurture the relationship while increasing revenue and profitability.
MailCharts has aggregated email and SMS examples from top brands displaying how to improve CLV throughout onboarding, cart abandonment reminders, win-back campaigns, and automated messages. Check them out by signing up for a free MailCharts account.
