Your customers are your primary source of profit. They can make or break your business. Putting extra efforts towards the customers who are not your target audience might affect your profitability. To identify your all-star customers, who will bring you the highest return on investment, and how to maintain them, you must start calculating your Customer Lifetime Value (CLV).
CLV is the prediction of the total amount of revenues your business expects to get during its entire relationship with a customer. Calculating CLV guides your sales and marketing decision making and provides you with a powerful advantage over your competitors. Once you know your CLV you can use it to determine how much you can invest in sales and marketing to retain your existing customers and acquire new ones.
How to Calculate It
To calculate CLV you must take the average sale in your organization and multiply it by the average number of times that a customer repurchases from you in a given period, whether it’s in a month or a year. Then you multiply that figure by the average amount of time that a customer is active with you during their lifetime.
Let’s say that your average in your organization is a $100 and that your customer typically repurchases from you twice a year, that means on a yearly basis, a customer is worth $200 to you. Now on further inspection of your records, you might find that on average a customer hangs in there with you for about five years. When you multiply $200 a year times five years, the customer lifetime value sum will be $1000.
How It Boosts Your Business’s Profitability
Measuring CLV helps you guide your sales and marketing decision making in a way that will grow retention, reduce customer acquisition costs, encourage your current customers to spend a longer lifetime with your business, and help you determine who are your most valuable customers, and how you can successfully target this demographic for future sales.
The ability to identify your most valuable group of customers will help you dedicate more resources to serve them to make sure they will spend a longer lifetime with your business, which will increase your profitability, rather than spending time and effort to acquire customers whose lifetime value is not worth it.
How to Grow Your Customer Lifetime Value
Increasing your CLV relies on the happiness of your customer. The better your customer service and the more delightful the user experience you provide, the happier your customers will be and the longer they will stick around.
You must focus on encouraging your most valuable customers to do repeatedly bigger purchases, which can be achieved through implementing loyalty programs schemes. A customer who makes repeatable purchases are more profitable than the ones who make a single purchase, and the cost of retaining them is less than the cost of acquiring new ones. This is how you increase lifetime value.
According to 2016 customer loyalty statistics, 87% of customers said that they want loyalty programs, and 54% of them stated that they would purchase more to gain loyalty reward. Exclusive rewards, special offers, events for loyalty members only, will motivate customers to spend a longer lifetime with your business.
Having a loyalty program help customer engagement and increase customer lifetime for your business success.