5 Effective Strategies for Working with your Customer Lifetime Value

June 27, 2019
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If you're not working with Customer Lifetime Value, or CLV, we're here to tell you that you should. For the sake of clarity, think of CLV as a "gauge" that helps you cross-reference and measure various parts of your business, giving you vital intelligence that you can use for future planning.

With that said, the first thing to come to terms with is that "customer value" is as loose a marketing metric as they come. Depending on your industry and/or business, how you determine or formulate the value of your customers could be very different than the business across the street, but what remains constant is the importance of doing so.

When it comes to CLV, the "value" of your customers and/or segments is an objective monetary value. Determining that CLV is a bit tricky, as there are various ways of determining it, each having their own strengths and weaknesses. Here's a great way of determining your CLV for each customer:

  1. Determine your Average Purchase Value = Total Revenue (in a year) / Total Purchases (in a year)
  2. Determine your Average Purchase Frequency Rate = Number of Purchases (in a year) / Number of Unique Customers (in a year)
  3. Determine your Customer Value = Average Purchase Value * Average Purchase Frequency Rate
  4. Determine your Annual Churn Rate = 1 - (Number of Unique Customers Who Purchased Over the Last Two Years / Number of Unique Customers Who Purchased Last Year)
  5. Determine your Average Customer Lifespan (in years) = 1 / Annual Churn Rate
  6. Determine your Customer Lifetime Value = Customer Value * Average Customer Lifespan

With CLV in hand, we want to show you 5 ways in which you can use the key business “gauge” that is CLV to get your business really pumping.

GET A TRUE PICTURE WITH RFM

Now, we’re big believers in RFM being an amazing way to govern your overall customer approach. It’s such a clean and easy way of compartmentalizing your customers into segments that help you focus your attention on those that are “most valuable”. If you need help determining your RFM, check out our blog article that covers this in depth.

But RFM analysis doesn’t tell the whole story, and going a step further, when you combine RFM with your CLV calculations, you get a true idea of your most valuable customers. Depending on how aggressive you want to be with your marketing, you can get some great segmentation clusters that can all be treated differently.

For example, while RFM analysis may give you clusters of customers that were once loyal but are on the decline, combining it with CLV will give you a more objective look at which of those customers are worth putting time, money, and effort into trying to retain.

PRODUCTS THAT DELIVER VALUE

Armed with an idea of your RFM and CLV scores, it’s all about taking those metrics and using them as a gauge to measure the efficacy of various aspects of your marketing and sales. One of those is decisions about your product range, services, and offers.

To start, you can dig into which products are giving you the most value and those that are having a negative net effect on your CLV. You can try to build out your range to better fit the needs and demands of your most valuable customers, while looking at ways to enhance the resources, presentation, and overall marketing of those products.

On the other side, if you have a group of low-CLV customers that you know primarily shop when there are deals or sales, you can segment this group, identify what they’re buying, and offer them deals or notify them when a relevant offer comes up. Check out how automation can make this process even more efficient and cost-effective.

FOCUSING ON RETENTION

You’ve probably heard it 100’s of times, but keeping a customer, especially one with a strong CLV, is so much cheaper and more effective than trying to acquire new customers. That small, dedicated segment of your customers are actually going to generate the lion’s share of your revenue, up to 18x more than an average customer.

Now that you’ve done your homework and actually identified your most loyal and profitable customers, put the effort into retaining them with a common-sense approach to your customer service and keeping your business top-of-mind with a relationship-building communication strategy.

Offer them exclusive discounts, give them sneak peeks at upcoming releases, start a loyalty program, and be sure to take advantage of both your social presence and email marketing. There are plenty of resources on how to do this, but above all the important thing to do is make sure you’re focusing enough energy and resources on retention and not just acquisition.

OPTIMIZING ACQUISITION

While CLV gives you an idea of the value of a customer, it doesn’t tell you the whole story, since how you got them, and how much it cost you to get them, is the other side of the coin.

By cross-referencing your CLV with your Customer Acquisition Cost, or CAC, you can easily see which ads and channels are going to give the greatest ROI and better gauge where you can spend more and where you should be spending less.

This not only helps in the short term, giving you some immediate direction in terms of ad spending and lead generation, but also in the long term, giving you a framework in which to plan how much overall budget you’ll need for your marketing mix.

SELL MORE EFFECTIVELY

So now that you have your customers segmented by CLV, have worked with your range, fine-tuned your customer support, and optimized your marketing, it’s time to look at the bigger picture and do what you can to start raising your CLV.

One of the primary drivers of increasing your CLV will be getting your customers to spend more on each order, in other words, you need to bump up your AOV. Now that you have a better understanding of the value of your customers and channels and better know what they want, you can work on optimizing your upselling and cross-selling solutions.

You’ll also want to try and capitalize on the all the lost sales from abandoned carts. Not only has sending an abandoned cart email within the first 24 hours after abandonment proven to be extremely powerful, but your customers are not only telling you which items they want, but also inadvertently telling you what they're interested in when it comes to cross-selling and upselling. Use it!

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