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
- Build relationships with customers through shared values that foster loyalty. Use social media sites to connect, like Facebook and Twitter.
- Through expertise and education, become the customers’ trusted advisor.
- Track customer satisfaction. Consider using a Net Promoter Score survey that primarily asks your customers whether they would recommend you to someone else.
- 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.
- Re-emphasize your value: It’s reinforcing to know you’re getting the best bang for your buck.
- Reduce customer effort
- Connect with customers on the channels they prefer.
- Optimize your onboarding. Give customers simple and clear instructions for product usage.
- Make it easy to reach you—a button on every Web page, for example.
- Deliver excellent service
- Take a proactive approach to customer service to eliminate problems before they occur.
- 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.
- Go the extra mile.
- Personalize communications to strengthen the bond with your brand.
- Empathize with your customers/understand their pain points. They’ll appreciate and remember the respect you’ve given them.
- Ensure that customer care staff are empowered to resolve issues quickly.
- Be authentic and sincere when addressing customer concerns.
Remember: If you can keep your customers happy, you’ll keep your customers.