Creating Customer Lifetime Value

Customer lifetime value (CLV) is the dollar amount that represents a customer’s worth to your business from first transaction to last.

CLV calculation=revenue x gross margin x average number of repeat purchases.

The CLV is a powerful metric because even small increases in CLV can lead to huge gains in overall revenue. For example, get 1,000 of your customers, who pay you $50 per month, to stay with you for a year instead of 10 months, and your annual revenue grows from $500,000 to $600,000.

But the benefit is not only incremental. First of all, customer profitability tends to increase over the life of a retained customer. Second, on average, it costs up to seven times less to sell to customers with whom you already have a relationship. After all, you’ve already attracted and educated them.

While customer acquisition will always be a driver for businesses, research has shown that customer retention is a faster route to revenue growth than customer acquisition.

An infographic from Invesp Consulting shows that increasing customer retention by 5 percent can lead to an increase in profits of 25 percent to 95 percent. The infographic also illustrates that the likelihood of converting an existing customer into a repeat customer is 60 to 70 percent, while the probability of converting a new lead is 5 to 20 percent.

Brands have learned that three key factors contribute to customer retention. They are: Keep the customer happy, reduce customer effort and deliver excellent customer service.

To improve CLV, companies should offer a mix of the following customer retention strategies:

  • Keep the customer happy
    1. Build relationships with customers through shared values that foster loyalty. Use social media sites to connect, like Facebook and Twitter.
    2. Through expertise and education, become the customers’ trusted advisor.
    3. Track customer satisfaction. Consider using a Net Promoter Score survey that primarily asks your customers whether they would recommend you to someone else.
    4. Make great customer service the norm. To go above and beyond, surprise your customers with small customer appreciation gifts, handwritten notes or even a personal email to say thanks.
    5. Re-emphasize your value: It’s reinforcing to know you’re getting the best bang for your buck.
  • Reduce customer effort
    1. Connect with customers on the channels they prefer.
    2. Optimize your onboarding. Give customers simple and clear instructions for product usage.
    3. Make it easy to reach you—a button on every Web page, for example.
  • Deliver excellent service
    1. Take a proactive approach to customer service to eliminate problems before they occur.
    2. Set customer expectations early and a little lower than you can provide to eliminate uncertainty about the level of your service and to ensure you always deliver on your promises.
    3. Go the extra mile.
    4. Personalize communications to strengthen the bond with your brand.
    5. Empathize with your customers/understand their pain points. They’ll appreciate and remember the respect you’ve given them.
    6. Ensure that customer care staff are empowered to resolve issues quickly.
    7. Be authentic and sincere when addressing customer concerns.

Remember: If you can keep your customers happy, you’ll keep your customers.