Every business, big or small, aspires to acquire a new customer base. But rising advertising costs can be a big blow to the morale of small businesses. Even content marketing and SEO are, to some extent, expensive to implement.
How do you generate profits in a scenario like this? By simply turning a one-time buyer into a repeat customer.
Increasing customer lifetime value is challenging, but doable. In this guide, we shall explore what an improved customer lifetime value means for your business, and what role can email marketing efforts play in increasing it.
What is customer lifetime value?
Customer lifetime value is a business metric that measures the total business generated by a customer through the entire course of the customer relationship.
Customers are vital to the business. However, everything valuable comes at a cost. For sustenance, the value coming in should always be more than the cost incurred to make that happen. The metric for calculating how much an organization spends to acquire new customers is called Customer Acquisition Cost, or CAC.
As a rule of thumb, the customer lifetime value should be more than 3X of the cost of acquiring the customer. You can use Mailmodo’s easy-to-use CAC calculator to calculate your CAC instantly.
So, if you incur a cost of $100 to add every new customer, then ideally, the customer should spend at least $300 through the entire course of her customer journey.
Why is CLV an essential metric for your business?
A lot of statistical information points to the importance of customer retention, such as the given data by Invesp Consulting:
Acquiring a new customer can cost five times more than retaining an existing customer.
The success rate of selling to a customer you already have is 60-70%, while the success of selling to a new customer is 5-20%.
Increasing customer retention by 5% can increase profits from 25-95%.
However, is that true across all the customer segments for your business? Are you truly gaining more through your efforts focused on retaining loyal customers? The answers can vary depending on the kind of business. What is your average ticket size? What pattern of repeat business do you get?
Hence, CLV is an important metric to measure. It is this metric that will help you to answer the following:
What customer segments cost more to retain than the revenue they bring in?
Which customers/segments need more investment to generate more revenue?
Should we focus more on getting new customers or on customer retention?
What kind of customer loyalty programs will work?
How to calculate CLV?
A few customer data points are needed to calculate the CLV for a specific period (usually over a year).
1. Average purchase value
It refers to the average amount that the customers spend on each purchase.
Average purchase value= (Total revenue) / (Total number of purchases)
2. Average purchase frequency
It measures the number of times an average customer purchases a good or service in a specified period.
Average purchase frequency = (Number of purchases) / (Number of customers)
3. Customer value
It refers to the average amount of revenue brought in by the average customer.
Customer Value = (Average purchase value) x (Average purchase frequency)
4. Average customer lifespan
It measures the average length of time a customer continues buying from you (in years).
Average customer lifespan = (Sum of customer lifespans) / (Number of customers)
Now, CLV is calculated by the given formula:
Customer Lifetime Value(CLV) = (Customer value) x (Average customer lifespan)
This formula can be used to calculate CLV on different planes too, like a customer segment or a channel.
You can also use Mailmodo’s easy-to-use CLV calculator to calculate your CLV instantly.
9 strategic ways to increase your CLV
Enhancing CLV involves strategies aimed at increasing the value of each customer relationship through improved satisfaction, loyalty, and engagement.
By creating exceptional customer experiences and delivering ongoing value, businesses can foster deeper connections with their customers, ultimately driving sustained growth. Recently, email marketing has emerged as the most effective digital marketing tactic for customer retention at 56%.
Let’s take a look at some effective strategies to boost CLV:
1. Improve customer onboarding
A smooth and engaging onboarding process helps customers quickly understand the value of your product or service, setting the stage for long-term satisfaction.
You can offer personalized onboarding experiences, provide clear instructions, and ensure easy access to customer support. You can also consider using tutorials, guided tours, and even on-call onboarding sessions.
One effective customer onboarding tip is to send the on boarders more detailed welcome emails. Leveraging welcome emails is easy and can help increase revenue per unique customer right away.
Welcome emails have a whopping 91.43% opening rate. 74% of people expect to receive a welcome email as soon as they subscribe!
Welcome emails on average generate 320% more revenue per email basis, as compared to other promotional emails.
2. Compose hyper-personalized emails
Personalization of emails is not just addressing the sender by name. It needs much more to be effective! Hence, the term- hyper-personalized.
You can refer to the last contact, visit, or interaction for a better response. You can also share information based on the past purchased items or the total amount saved as part of a scheme. A meaningful and happy customer experience goes a long way toward setting a positive impression of your business.
3. Boost Average Order Value(AOV)
To enhance your Customer Lifetime Value (CLV), boosting your average order value is a highly effective strategy. Here are some effective ways to do so:
Set a minimum order requirement for free shipping and gifts and a minimum amount limit to avail coupons. These persuade buyers to buy more products to unlock a higher tier of discounts and free shipping, thereby increasing AOV.
Enhance upselling and cross-selling opportunities during the checkout process. You can offer complementary products to a customer who is already purchasing something. You can also convince customers to buy more expensive or upgraded versions of the product they are interested in. These offers entice the customers to spend more, thereby boosting CLV.
Offer product bundle deals and discounts. By combining complementary items and offering them at a discounted rate, you can not only increase the total purchase value but also encourage customers to buy more.
4. Create a cart abandonment workflow
Converting abandoned carts is another low-hanging fruit. A staggering average of 69% of online carts is being abandoned by users. 45% of cart abandonment emails are opened; 21% of all are clicked on, while 50% of the users who click end up purchasing.
An abandoned cart is where a customer has already shortlisted a product. Information about the product, the customer is already ready - all it needs is a timely push. Almost a third of clicks on abandoned cart emails (29.9%) lead to a recovered sale. Cart abandonment emails sent at the right time, mostly within the first hour of abandonment, perform best.
This example of a cart abandoned reminder email is perfect. It not only reminds the user about the abandoned item but also shares additional information to help the user make up his mind on the same page. They create great cross-sell opportunities as well by sharing other helpful product recommendations in the same email.
5. Re-engage inactive customers
According to a study by Salesforce, 63% of marketers said that re-engagement campaigns are “very effective”. A study by Return Path found that 45% of recipients who received win-back emails read subsequent messages.
Reactivated customers will naturally increase the average customer lifetime value. It is also an excellent opportunity to close the loop with unhappy customers who have chosen to move on. This is where you can get precious customer feedback to improve upon the customer experience and increase CLV for other patrons.
6. Drive post-purchase engagement
A successful cross-sell strategy is the “people also buy” tactic. Creating bundles, and packed product hampers increases your purchase value for future transactions. Additionally, when you are sending emails to buy a product again, you can offer a premium version or a better quality product, enhancing the upselling opportunities. Not only does this work as a positive reinforcement of the brand, but leaves the customer with an image in mind for future purchases.
The email snapshot above is an excellent example of a men’s grooming brand. It is not only engaging with the buyer but also suggesting other complementary products. It is a clever win-win strategy for the business as well as the customers.
7. Create great referral programs
An organic referral cycle is through great product and support experiences. The process is quite long and unpredictable. A referral program aims to engage the customer, generate revenue, and also acquire new customers in a much more calibrated manner. This works to increase the CLV by increasing the total revenue and bringing new customers into the fold in that process.
8. Send replenishment emails
Replenishment emails are another example of easy revenue. These emails prompt customers to repeat purchases of regular-use items like OTC medicines, diapers, shampoo, stationary, etc. These are usually triggered after a logical period when the previously purchased items are estimated to run out.
9. Enhance customer experience
Improving customer service makes customers feel more valued by your brand beyond just their transactions. A positive, consistent experience keeps customers loyal and reduces churn.
Enhance your customer service by implementing thorough training programs that cover product knowledge, best practices, and problem-solving. Include skills like active listening, empathy, and clear communication.
Establish a system for collecting and analyzing customer service feedback. While sending surveys is useful, it’s crucial to have a process for reviewing and acting on the feedback regularly. This will help you identify and address recurring issues and spot patterns or trends.
Utilize omni-channel customer support to ensure a seamless and consistent experience. Provide assistance across various platforms, including phone, email, live chat, and social media. Utilize technology like chatbots and automated support systems to provide quick responses to frequent customer inquiries.
Limitations of customer lifetime value
Despite what seems like a relatively simple formula, only 42% of companies manage to measure customer lifetime value accurately.
The biggest limitation of CLV is that it does not consider any change in customer behavior. It assumes that if you spend $200 on groceries every month, you shall continue to do so for the entire period of your business relationship at the grocery store. There are so many variables that dictate customer behavior that it is difficult to predict it even with the best data.
A traditional CLV formula can be used to counter some of the disadvantages mentioned above. This formula tries to adjust the changing YOY customer costs and revenues and can result in a more accurate evaluation.
Customer lifetime value is a crucial metric but it should not be considered in isolation. CLV, along with other metrics like customer acquisition cost (CAC), Net promoter score (NPS), and customer satisfaction (CSAT) should give a more holistic idea about customer behavior in the organization.
Conclusion
Customer lifetime value is an absolute metric that has its limitations due to a lack of long-term predictability. However, it is a great metric for a high-level understanding of how much revenue each customer or segment will create. The key is to increase average order value and customer retention while keeping the cost of acquisition minimum.
Word-of-mouth marketing is another great way to acquire customers with less investment. Read our guide to discover how to build a successful word-of-mouth marketing strategy.
