Customer lifetime value (LTV) is a significantly important metric for any growth company. So, what exactly is it? Why is it important? And how can you measure and increase it? Here we answer all these key questions to help you better understand why you should and how you can boost customer LTV.
What Is Customer Lifetime Value?
Customer lifetime value is a metric that tells you the average amount of revenue customers will generate over the lifespan of your relationship.
It looks at how much your customers have spent over a defined period and, using this, you can anticipate how much they are likely to spend on your products in the future. It also takes factors into account like customer acquisition costs, sales, marketing and operating expenses, and product manufacturing costs.
The longer a customer continues to spend money with your brand, the greater their customer lifetime value becomes.
Why Is Customer Lifetime Value Important?
Firstly, customer LTV is important because the higher it is, the bigger your profits. Secondly, knowing your customer LTV gives you valuable insight into how good your products are and how well you are engaging with your customers.
If your LTV is high, it is telling you that you are making a positive impression on your customers. If it is low, it is telling you the opposite and so you need to put more time and effort into improving your product or marketing, or both.
Knowing your customer lifetime value can also boost your return on investment (ROI). By helping you identify your high lifetime value customers, you can reduce ad spend by targeting your efforts here. This is cheaper than acquiring new customers and allows you to increase the value of these customers further.
How to Measure Customer Lifetime Value?
There are several ways that you can calculate customer lifetime value. Two of the most common ones are the historical method and the predictive method.
1. The Historical Method
This is the simplest way to calculate customer LTV as follows:
Yearly customer revenue x Length of your relationship in years – Total acquisition and serving costs
Here is an example:
Customer A spends US$800 per year. She has been a customer for five years. You spent US$50 on sales and marketing to acquire her and US$50 per year on serving them.
US$800 x 5 = 4,000
US$4,000 – US$300 = US$3,700
So, Customer A’s LTV is $3,700.
2. The Predictive Method
This is more useful in ecommerce where sales patterns tend to be inconsistent. This approach models your customers’ transactional behavior and predicts what they will do in the future.
Average number of monthly transactions x Average amount spent during each transaction x Average number of months your customers stay loyal x Average gross margin / Number of customers across this period
The bigger your ecommerce business and the more complex your product offerings, the more complicated calculating LTV becomes.
How Can You Increase Customer Lifetime Value?
Because LTV is ultimately about forming long-lasting positive relationships with your customers, it makes sense that to boost LTV you need to work on these relationships.
Marketing, along with sales and customer support, play a crucial role in directly influencing these relationships. To build the kind of positive relationships that grow customer lifetime value, you need to understand and enhance the customer journey.
Here are some recommendations:
1. Personalize the customer experience
By delivering timely, personalized customer experiences at every touchpoint – from your website to your social media – you can get your customers to stick around and spend more with your brand. Research shows that 91 percent of customers are more likely to shop with a brand that delivers relevant offers and recommendations.
2. Keep customers engaged with quality content
Helpful, informative content served up throughout the purchase journey can also keep your customers engaged. By communicating with them on a regular basis in a non-promotional way, your brand will be seen as an expert and stay front of mind.
3. Nurture your loyal customers
Whether it takes the form of a card or app, ensure you have a scheme that rewards your loyal customers every time they buy from you. In addition, further nurture your relationships with them with targeted offers and special discounts that recognize their loyalty, such as free shipping or exclusive early access to new products.
4. Be known for exceptional customer service
The quality of your customer service can have a big impact on your retention rates. Research shows that 92 percent of customers say it makes a difference in whether or not they are loyal to a brand. Because of this, make sure your customer service, on the phone and via social media, is polite, knowledgeable, and prompt.
5. Re-engage with dissatisfied customers
Just because a customer has made a complaint, doesn’t mean they are a lost cause. By reaching out and making an effort to listen to them, it is possible to turn them back into happy customers. If handled well, these actions may even increase their loyalty towards you.
6. Acquire more high-value customers
As well as nurturing your existing customers to boost their LTV, you should also look to acquire more high-value customers in the first place. Using deep learning tools to predict and rank conversion rates, you can determine which segments are most likely to convert and then target these valuable segments.
By understanding what customer lifetime value is, how you can work it out, and how to increase it, you can grow your brand and boost your profits. Connecting with your customers in a relevant way will help you build trust and relationships, keeping them sticky.
* Do you want to learn more about how to boost your customer lifetime value metrics? Get in touch with our team today for an exclusive consultation.