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Every time you look up, it seems as if there’s another metric or analytic to track as it relates to your business. There are KPIs, KSIs, and even KRIs. Then you’ve got CSF, OKR, and OGSM. And those are just the categories of metrics! Underneath each of these headings, there are dozens of different measurements for your eyes to feast on.
If you wanted to, you could spend your entire workweek analyzing data and trying to make sense of where your business stands. But that’s not the best use of your time.
In fact, you can get an accurate pulse of how your business is doing at any time by just tracking a handful of critical metrics. One of the most telling is something known as Customer Lifetime Value.
Armed with an understanding of your Customer Lifetime Value, or CLV, you can make more intelligent decisions about sales, marketing, branding, pricing, service, retention, and profitability. It’s a revealing data point that promises to provide clarity at nearly every level of your business. The question is, do you have a bead on your CLV?
Table of Contents
What is Customer Lifetime Value?
The name is pretty self-explanatory, but let’s go ahead and make sure we’re on the same page regarding what we mean by customer lifetime value.
The simplest definition is that customer lifetime value is the measurement of how much money a customer will yield over their entire time as a paying customer.
In other words, CLV looks beyond how much a customer spends in one transaction (or even how much they spend over the course of a year) and instead focuses on the total amount of money they’ll bring in over their lifetime.
In the most basic sense, CLV tells you how much a customer is worth so that you can better understand how much to spend acquiring and retaining them for maximum profitability.
While we’ll refer to customer lifetime value by the acronym CLV in this guide, you should know that it’s also known as CLTV and LTV in other circles. But regardless of the acronym used, everyone is referring to the same thing.
Calculating Customer Lifetime Value
No need for a fancy calculator or mathematics degree to calculate CLV. You only need a handful of numbers and you can quickly transform them into a crisp number that tells you exactly where you stand.
Here’s the basic CLV formula:
CLV = [Avg Order Value] x [Avg Purchase Frequency] x [Avg Customer Lifetime]
Let’s use McDonald’s as an example. If McDonald’s executives know that the average order value is $7 and that they make approximately 15 purchases per year for an average of 40 years, the equation would look something like this:
CLV = $7 x 15 x 40
That number comes out to $4,200 (purely hypothetical).
Based on this number, McDonald’s knows that they’re going to make an average of $4,200 in top-line revenue off of every customer at the register. (They’ll make $1,000 on some customers and $10,000 on others – but the average is $4,200.) This helps them better understand how much they can afford to spend to acquire and retain these customers.
For example, if McDonald’s is only spending an average of $25 in marketing and ad spend to acquire a customer and another $75 to retain that customer over their lifetime…well, that’s a pretty profitable arrangement. But if they’re spending $1,500 to acquire a customer and another $3,000 to retain that customer over the next several decades, they’re actually in the red. They’re losing money!
Why Does Customer Lifetime Value Matter?
In addition to proving clarity on the profitability of each customer and giving you insight into how much you can reasonably spend on your digital marketing and advertising to acquire/retain a customer, the CLV metric offers a number of other important points of value – including:
1. Puts an Emphasis on Retention
Most companies take a backward approach to generating revenue. They focus on how much they can reasonably spend on acquisition in order to move the needle in a positive direction. And while there’s certainly a case to be made for spending, that’s really the wrong way to look at CLV. In reality, the focus should be on retention. (It’s just a matter of understanding the math.)
For every 1 percent of customers who return after their initial purchase to make a follow-up purchase, you’re basically increasing your revenue by 10 percent. Extrapolated, that means growing retention by roughly 10 percent effectively doubles your revenue.
If you want to think about it another way, reducing churn by just 5 percent can increase your profits to the tune of 25 percent to 125 percent. Small changes for big gains!
2. Justifies Incentive-Based Marketing
If you’re struggling with how to get customers to come back and make repeat purchases after an initial transaction with your business, understanding your CLV gives you the freedom to be a bit more aggressive. This is especially true when you’re the person tasked with getting the decision maker to sign off on a new campaign.
While it might be different in your industry, we know that in ecommerce the probability of selling to a new customer on your website is somewhere in the 1 percent to 5 percent range (depending on how dialed in your website is and what the quality of your traffic looks like). Yet the probability of selling to an existing customer who visits your website is in the 60 to 70 percent range. Not only that, but returning customers will spend an average of 67 percent more than a first-time buyer.
All of those numbers support the idea of pursuing existing customers, and they may very well serve as the justification for launching powerful incentive-based marketing campaigns. A high CLV is basically a green light for reshaping your marketing to focus on the lowest hanging fruit.
3. Focuses Your Efforts Around Loyalty
With very few exceptions, most businesses find that their revenue follows the Pareto Principle. In other words, 80 percent of revenue comes from just 20 percent of customers. CLV helps you identify who the 20 percent are.
While you’ll have to do some digging in order to segment your own customer list, most businesses get to the point where they calculate separate CLV for different portions of their customer base. In other words, you might have different CLV calculations for different demographics. And then based on the data that pops out of these calculations, it becomes clear who your most profitable targets are.
Once you know who your “top 20 percent” customers are, you can focus your loyalty efforts around them. You don’t necessarily have to tell the other 80 percent to go take a hike, but some of the resources that are going to those groups can be efficiently reallocated to the 20 percenters.
Specific Strategies for Maximizing Customer Lifetime Value
Now that we’re on the same page regarding customer lifetime value, what it is, why it matters, and how it can help you improve your bottom line, let’s explore a few specific strategies you can leverage to maximize CLV through better digital marketing:
1. Launch a Repeat Purchase Campaign
A repeat purchase campaign is exactly what it sounds like: A targeted campaign that’s designed to engage customers in the post-purchase process and encourage them to make a second purchase (and a third, fourth, fifth, etc.).
While you can target any customer with a repeat purchase campaign, most businesses choose to implement them with first-time customers. This is simply an exercise in resource maximization. There’s a much bigger lift to lifetime value when you get someone to make a second purchase (because it dramatically increases the chances that they’ll stick around for the long haul).
Repeat purchase campaigns are most effective when there’s a coupon, discount, or other incentive to make another purchase. It may be as simple as putting a coupon for free shipping or a 20 percent discount code in their shopping bag or package.
2. Create a Cross-Sell Campaign
If you operate a business that sells products in multiple categories – or even complementary products in the same category – cross-sell campaigns are excellent for getting customers to make additional purchases.
While you can always offer cross-sell options at checkout, your best chance of increasing CLV comes from future cross-sell campaigns. Keep the average customer lifetime cycle in mind and think about which products they’re likely to need and when. For example, if a customer buys a 20-gallon plastic trash can, you know that the customer is likely to need trash bags in the future. A good cross-sell campaign would promote trash bags in the weeks after the initial purchase was made.
3. Build a Replenishment Campaign
Replenishment campaigns work especially well for companies that sell perishable or consumable goods. The goal here is to reach customers precisely when they need to replenish the original purchase (or ideally just prior to it). If you can do this over and over again, it creates predictable profits from repeat customers.
Using the example above, you’d want to know how long it takes the average customer to go through a pack of trash bags. If you know that it takes roughly 60 days, you can set up a replenishment campaign to target customers who purchased trash bags 50 to 70 days prior. This is how you stay top of mind at the most important part of the customer lifecycle.
4. Offer 24/7/365 Support
Offering around-the-clock customer support might seem like a waste of resources, but it can be one of the most important steps in nurturing customers and turning them into loyal supporters of your brand (who make repeat purchases).
Customer support is more than just problem-solving – it’s community building. Yes, a customer might call because they can’t figure out how to screw together some pieces on the table they bought, but the interaction provides an avenue for building trust and rapport.
We encourage 24/7/365 support whenever possible – simply because it’s convenient. If you’re selling locally, 95 percent of your customer inquiries will come during business hours. And unless you’re in a service business where emergencies must be dealt with right away, it’s not like you’ll get a bunch of calls on Christmas Day. It’s more the principle of being always available that makes customers like you.
Hire good customer support staff and train them to ask questions and listen well. Task them with doing everything they can to make sure a customer leaves the conversation feeling happy and satisfied.
5. Maintain a Knowledge Base
Having a knowledge base is important for a number of reasons. For starters, it gives your customers self-service options, which cuts down on the number of customer support tickets, emails, and phone calls you receive. But most importantly, it positions your business as helpful and knowledgeable.
A good knowledge base should consist of a variety of content, including articles, video guides, tutorials, instruction manuals, and printable resources. You can host the content on your website, but you may also send links as part of an automated response system when a customer sends an email to your support team.
6. Use Ad Retargeting
Ad targeting is an incredibly complex and sophisticated advertising strategy that’s been totally streamlined over the past few years thanks to a few advanced platforms. All you have to do is throw a few ads into a system, install the correct pixels on your website, and you can actually “follow” customers around the internet and serve ads to them at every turn.
7. Nurture With Segmented Emails
There’s so much value in email. Studies show that for every $1 spent on email, businesses typically generate an average of $44 in revenue. But the key to successful email campaigns is to segment appropriately and send at the right time.
Segmenting your list is the first order of business. You want to create separate “sub lists” within your big email list to target different people at different times. For example, you might have a list of customers who’ve purchased within the last 90 days, a list of customers who bought product X, and a list of customers who are on your list but have never made a purchase. With proper segmentation, you’re able to tailor your messaging better.
The second order of business is to get the timing right. You’re trying to nurture – not bombard. Think of it as a steady drip of the faucet, as opposed to turning it on full blast. Every business is different, but a typical nurturing sequence involves sending emails at an interval like this: day 1, day 3, day 7, day 15, and day 30.
8. Collect (and Apply) Feedback
If you’re truly serious about improving CLV, you need to ask your customers what they want, listen to their feedback, and then apply those insights. One of the best ways to do this is by sending out something like a Net Promoter Score (NPS) survey or Customer Satisfaction (CSAT) survey. Both are relatively simple to implement – particularly if you have an engaged email list.
Once you gather feedback, you have to implement it. Look for the low hanging opportunities. Find out which small steps have the potential to create big gains and zero in on them.
Next Steps to Get Started
Hopefully, the different campaign ideas and marketing suggestions mentioned above give you some inspiration for beefing up your customer lifetime value. But if you’re like many marketers and business owners, you’re probably wondering how to best get started. In other words, what are some simple steps you can take today to lay the foundation for future campaigns like these?
Every business is different, but if you haven’t already done the following, we’d recommend beginning here:
1. Collect the Right Data
It’s impossible to maximize your CLV if you don’t have the right data. The good news is that collecting data is easier than ever – you just have to turn on the right taps and make sure all of your various data collection platforms are properly connected.
In addition to Google Analytics, you’ll want to pull data from each of your social media channels, your email marketing platform, and your CRM. This data can then be unified and centralized using something like an Activated Customer Data Platform. Armed with this information, it’s much easier to create segments for personalized campaigns and communications.
2. Build Out a Content Team
Content makes the marketing world go round. Personalize messaging for every stage of the customer lifecycle (and for each segment). This includes a steady drip of well-timed email content (most of which can be templated and automated), an infusion of fresh blog content every week or two, and a social media posting calendar.
3. Expand to an Omnichannel Approach
Did you know that customers who shop via multiple channels have a 30 percent higher customer lifetime value than customers who only shop on one channel? That’s a pretty significant boost – and it speaks to the value of an omnichannel marketing approach.
The days of customers using one device and one channel to buy a product are over. Customers are using multiple devices and multiple channels (often in the same day). By using a n omnichannel marketing approach that incorporates email, social media, PPC ads, and even SMS, you give yourself multiple touchpoints.
4. Implement and Iterate
The final suggestion – at least in terms of getting started – is to just do it. Stop worrying about perfection and focus on progress. Implement what you’ve learned as soon as possible and then iterate the process as you learn from your successes and mistakes. Improving CLV is something you’ll be focused on indefinitely. There’s no better time to start than today.
SEO.co: White Hat Link Building for Maximum Exposure
At SEO.co, we believe content is the key to any successful marketing, advertising, or promotional strategy. Whether you’re looking to increase exposure and onboard new clients, or you want to nurture your existing customer and stay top of mind, a white hat link building campaign can help.
The biggest problem with link building – and the reason so many businesses write it off – is that most link builders have absolutely no clue what they’re doing. They create thin content, peddle it to low DA publishers, and then see diminishing returns on their “handy work.” In other words, they’re doing it all wrong.
But the reality is that the Google algorithm loves links. (It’s one of their top two or three ranking factors.) And when it’s done the right way, link building allows brands to scale the search rankings, improve reach, generate more traffic, and cultivate a higher degree of familiarity and trust with the right types of customers.
For more information on how SEO.co can help you scale your organic traffic and exposure with clean, ethical, and high-quality content and links, simply contact us today!
He is a recurring speaker at the Search Marketing Expo conference series and a TEDx Talker. Today he works directly with high-end clients across all verticals to maximize on and off-site SEO ROI through content marketing and link building. Connect with Sam on Linkedin.
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