Understanding Customer Lifetime Value, Benefits, and How to Increase It
Customer Lifetime Value (CLV) is one of the indicators used to determine the value of a company's customers. This metric is considered accurate so it is widely used by companies in calculating their customer value.
This metric can help to find out the cost for each effort to attract customers.
Even though it has a role, at first glance it is still not considered important by some people. In fact, forgetting CLV can have negative consequences on business competition.
Definition of Customer Lifetime Value
Customer lifetime value (CLV) is an important metric for measuring a company's growth. Clv refers to the value of a consumer towards a brand as long as he is a customer.
You need to know that customer lifetime value is one of the metrics that can be tracked to measure how valuable a consumer is in terms of the length of time he has subscribed, which is calculated from the first purchase.
In general, this customer lifetime value will help you retain existing customers. Because getting new customers is much more difficult and requires more time and costs than maintaining existing ones.
When a business starts to think about customer benefits, the main parameters that become indicators to consider are as follows:
- Revenue-related purchases
- Cost of goods sold
- The cost of acquiring customers
Additional costs associated with the manufacture of goods or services.
In addition, understanding CLV will also help your business to develop strategies to increase sales while on the other hand it can maintain stable profit margins.
This customer lifetime value is often equated with the net promoter score (NPS), but in fact the two are very different because NPS only measures customer satisfaction without relating it to the time span a consumer interacts with your brand.
How to calculate Customer Lifetime Value
Measurement of customer lifetime value itself will be more accurate by considering 2 things. First, the behavior and purchasing patterns of current customers. Second, predict the behavior and purchasing patterns of customers. The second point will really depend on the capability or how well the company is doing the analysis
To calculate customer lifetime value, there is a basic formula that you can use, namely:
clv formula = Average transaction value x (Number of transactions in one year x Retention time)
Benefits of Customer Lifetime Value
By calculating the CLV, you can estimate the maximum cost of customer acquisition. More fundamentally, you can find out which customers value the most. That way, if you intend to do customer segmentation, it will be very helpful. However, here are some other benefits of customer lifetime value, namely:
1. Increase Customer Loyalty
When calculating CLV, you will evaluate the customer experience, both directly and indirectly. As a result, later you will find gaps that can still be repaired to increase customer satisfaction. If customer satisfaction is getting better, then the customer loyalty will also be higher for your product or service and your brand.
Every business's products and services may be easily imitated by competitors, but a company that is good at creating customer loyalty will be difficult to imitate.
The loyalty of the customers you already have is what differentiates your business from your competitors. You can increase customer loyalty by giving good feedback, discounts and anything that keeps them loyal to your business.
2. Optimizing Marketing Strategy
After calculating the CLV, you will understand consumer segmentation based on the amount of value your business provides. You can use this segmentation to determine a more targeted marketing strategy.
The two basic tactics in any marketing program are up-sell and cross-sell. But which one to do? When? And for what segment?
Well, this CLV can give you a good picture of the expected return to guide decisions and invest in the right up-sell and cross-sell.
As explained, bringing in new customers will feel more difficult to do.
Therefore, your business needs to make an effort to retain existing customers. By retaining current customers, you can be more cost effective.
This is because you don't need to spend a lot of money on advertising, creating marketing strategies, or paying people to work together to create promotional content.
4. Make Customer Segmentation
CLV allows your business to classify different customer groups and potential customer groups based on long-term profitability, so you can decide whether to change your market strategy or not.
5. Help determine the customer acquisition cost
Customer acquisition costs are the costs you have to pay to generate customers.
By calculating CLV, you can finally predict how much these costs will be based on the estimated profit that you will get from them later.
This is very important, especially when you have to allocate a budget as efficiently as possible.
How to Increase Customer Lifetime Value
So, how to increase CLV so that your business can get all the benefits above? The following are tips for increasing Customer Lifetime Value:
1. Give a promotion
A proven efficient way to increase customer lifetime value is to implement promotional programs for customers.
This kind of program will bind your customers so that their retention can increase.
Let's say you do a "Purchase One Get One" or "Reward with Buy" promotion per Monday, then the potential for customers to return to your place on Monday is even greater.
It must also be remembered that CLV is a tool and not a strategy to increase the opportunity to increase profits.
2. Collect Customer Feedback
Try running surveys and polls on your existing customer base and ask them how you can improve your business services.
Often it is loyal customers who usually provide great solutions, listen carefully and give praise to customers who point out mistakes in your business.
3. Create a reward system
You can improve relationships with customers so that they continue to be interested in making purchases by implementing a loyalty reward system. Incentivize customers so that they return to increase the frequency of purchases in a shorter time.
4. Upsell and cross-sell
This strategy aims to encourage customers to make premium subscriptions or buy additional products that suit their needs. In this case, know the value of your product, then get to know your customers and their needs.
5. Improve customer experience
How the latest information about your product is found, whether it is easy or difficult, is part of the customer experience that also drives the purchase decision. The same goes for the services you provide. Customer service that is responsive and solution-oriented will result in positive interactions that will make customers more loyal to your product.
Knowing customer lifetime value also makes it easier for you as a business owner to create the best program based on the ability of each customer's buyer and also their level of loyalty.
This also allows you to find out which customers can be said to be loyal and deserving of rewards which can later increase customer satisfaction.
Trying to satisfy consumers with high customer lifetime value is clearly more promising than if you give rewards randomly in the hope that they will help increase purchases significantly.