Customer Lifetime Value (CLV) is a critical measure of business success. The metric refers to the value contributed by an average customer over a lifetime, and a relevant measure for almost any type of business. In this post, you will learn how CLV is calculated and also what action you can take to improve this critical metric.
How is CLV Calculated?
Calculating the customer lifetime value measurement is not that difficult; there are different ways to calculate the metric. The most straightforward way is to subtract the cost of acquiring a customer from total revenue generated by that customer during a given period.
Let’s assume that you spend $30 on attracting a new customer. And, the value of an average order is $100. Assume that there is a 20 percent chance that a customer who makes a purchase will make another purchase.
Thus, the customer lifetime value can be calculated as follows: $100 / (1-0.2) – $30 = $95.
How to Increase Customer Lifetime Value?
The aim of customer service and the marketing department should be to maximize customer value over a set time. This process means getting the customer to make repeated purchases through an active and integrated strategy.
Create a Personalized and Targeted Strategy
You must segment your customers based on total cost of acquisition. This process can increase the relevance of your customer service as well as your marketing strategy. For example, you could advertise to your customers through different channels on social media and live agent support with website chat integration.
Focus on Customer Retention
Businesses are spending a lot more resources to acquire new customers as compared to holding on to existing ones. But, your customer service and marketing strategy should not overlook retaining existing customers. The success should be measured by finding out the impact on the average CLV of the targeted customers. To do this, you will need accurate predictive analytics to find out how the influence of different marketing actions can benefit you. While establishing customer lifetime value measurement processes can take a little upfront work, it will pay off!
Find Out Behavioral Triggers
An effective way to maximize CLV is to find out behavioral triggers. Organizing data into clusters can help you discover triggers and trends for customers. That is extremely valuable for knowing how to incentivize customers to continue purchasing from your company. Also, you should try to replicate the strategy in converting leads into first-time purchasers.
Customer lifetime value measurement can provide the framework you need to not only gauge your customer service and marketing strategy but also improve your business prospects. You should focus on optimizing CLV by reducing the acquisition cost (AC) and maximizing lifetime value. The ratio of CLV: AC should be as high as possible as this is an indication that the company is on track to generating higher revenues as well as watching its profits increase one step at a time and Monitor real time traffic of their sites.