The Key to Business Success: Improving Customer Lifetime Value
Feb 17, 2023
10 min read
Customer Lifetime Value is a crucial metric that helps businesses determine the financial value of their customers. It is a calculation that allows businesses to estimate the total amount of revenue that can be expected from a customer over the course of their entire relationship with the brand.
Knowing your CLV enables you to make informed decisions about how much you should be investing in customer acquisition and retention efforts, as well as how to allocate your marketing budget more effectively. Despite the importance of this metric, many businesses find it challenging to calculate due to its complexity. However, with the right approach and tools, calculating your CLV can be a straightforward process that can provide a wealth of valuable insights.
In this article, we will walk you through a step-by-step guide on how to calculate your customer lifetime value and explain how you can leverage this information to optimize your business strategy.
What is Customer Lifetime Value?
Customer Lifetime Value is a metric that measures the total amount of money a customer is expected to spend on a company's products or services over the course of their relationship with that company. It is an important metric for businesses as it helps them understand the value of each customer and make informed decisions about marketing, customer acquisition, and retention strategies.
Brand marketing is an important factor to consider when calculating customer lifetime value. A strong brand can increase customer loyalty, which in turn can lead to higher CLV. When customers feel a strong connection to a brand and its values, they are more likely to remain loyal to that brand and continue to make purchases over time.
Here are a few real-life examples of how CLV can be calculated and used:
- Subscription-based businesses: Companies that offer subscription-based services, such as streaming platforms or meal kit delivery services, can use CLV to calculate the total revenue they can expect to earn from each customer over the course of their subscription. This can help them make informed decisions about how much to spend on marketing and customer retention strategies.
- Retail businesses: Retail businesses can use CLV to identify their most valuable customers and create targeted marketing campaigns to retain them. For example, a clothing retailer might offer special promotions or discounts to customers who have a high CLV, as these customers are likely to make repeat purchases.
- Service-based businesses: Service-based businesses, such as law firms or accounting firms, can use CLV to identify which customers are most profitable and worth investing time and resources in. By focusing on customers with a high CLV, these businesses can maximize their revenue and profitability.
How to Calculate CLV?
There are different methods for calculating Customer Lifetime Value (CLV), but one common formula is:
CLV = $30 x 5 x 2 = $300
This means that the expected lifetime value of this customer to your business is $300.
It's important to note that this is just one method for calculating CLV, and other methods may be more appropriate depending on your business model and goals. Additionally, CLV is just one metric and should be considered in conjunction with other metrics to get a comprehensive understanding of your business's performance.
How To Increase Customer Lifetime Value?
While some companies have a competitive advantage that makes them less vulnerable to disruptions by competitors, most companies do not have this advantage. Therefore, they need to find ways to improve their operations and create a positive customer experience through customized and meaningful communication that can increase customer loyalty and retention.
These tactics can help to increase the customer lifetime value, especially for companies that do not have a strong competitive advantage.
1. Optimisation of the Onboarding
The first interaction between a customer and a company is critical in shaping the customer's perception of the company and their willingness to continue doing business with it. Research shows that customer churn rates are highest after just one interaction with a company, highlighting the importance of making a positive first impression.
To make a good first impression, companies should educate customers about their products and services and how they can benefit from them. This can involve providing clear and concise information about the features and benefits of the product, and addressing any questions or concerns the customer may have.
For service businesses, effective onboarding can be as simple as demonstrating a commitment to customer service and availability to address any issues the customer may have. Companies should make sure to be attentive to the needs of first-time customers, and work to alleviate any doubts or concerns they may have about their decision to purchase.
2. Making Communication Effective
Open communication between a company and its customers is an important factor in building and maintaining strong customer relationships. By keeping the lines of communication open, companies can demonstrate that they value their customers' opinions and feedback, and are committed to providing excellent customer service.
It helps in building customer loyalty and also increasing customer satisfaction. As it helps in the identification of areas for improvement and encourages customer advocacy.
When companies value their customers' opinions and feedback and work to address their needs, it facilitates strong customer relationships and helps to retain customers over time, leading to increased revenue and business growth.
3. Running Loyalty Programs
Loyalty programs can keep your customers coming back for more, and that translates into more revenue for your business. By offering exclusive rewards, discounts, and other perks, you can create a sense of excitement and appreciation among your customers.
But it's not just about the perks. A well-designed loyalty program can also help you build a deeper relationship with your customers. When customers feel like they're part of a special group, they're more likely to feel connected to your brand and develop a sense of loyalty. And that loyalty can pay off in the long run, as they continue to choose your business over competitors.
Let's take Starbucks as an example. They have a highly successful loyalty program called "Starbucks Rewards," which has been a key driver of their business growth.
One of the ways Starbucks Rewards helps increase CLV is by incentivizing customers to make more purchases. The program rewards customers with stars for each purchase they make, which can then be redeemed for free drinks, food, and other perks. By offering these rewards, Starbucks encourages customers to come back more frequently and spend more money, which can lead to a higher CLV.
But Starbucks Rewards isn't just about the rewards themselves - it's also about the sense of community and connection it creates among coffee drinkers. By giving members access to exclusive events, personalized offers, and a dedicated mobile app, Starbucks has built a loyal following of customers who feel like they're part of a special group. This sense of community can pay off in the long run, as loyal customers become brand advocates and refer their friends and family to Starbucks.
In Conclusion
Understanding and increasing customer lifetime value (CLV) is essential for any business looking to grow and thrive in today's competitive market. By focusing on building long-term relationships with your customers and providing them with exceptional experiences, you can increase CLV and drive business growth. At Saffron Edge, we understand that your business needs this and more. Reach out today to touch new levels of success with us!
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5 compelling reasons to include messenger chatbots in your marketing strategy
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How Shopping Cart Abandonments Impact eCommerce Brands: Seven Destructive Effects to Know About!
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Source:Pexels 4. Costs of Retargeting Rise Abandoned shopping carts cost businesses money, and not just in terms of sales revenue. Remembering how much was initially invested in acquiring those site visitors is essential when evaluating the efficacy of retargeting vs. more traditional paid advertising in terms of cost per click. Some companies spend thousands to get new customers to their websites and only a few dollars per customer to keep them there. 5. Lower Ad Click-Through-Rates Most eCommerce teams concentrate on regaining lost customers to reduce the number of abandoned shopping carts. However, you might never achieve a perfect shopping cart abandonment rate. Some website visitors may just do window shopping research for your company in preparation for a potential future purchase. It's possible that some of your potential customers are still in the research and learning phase and haven't even considered making a purchase yet. 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Cart abandonment can significantly affect nearly every metric tracked by your analytics platform. For example, visitors or bots that don't convert could spend a great amount of time on a given page, making you assume the page is very valuable to visitors. Or, they can quit on similar pages, making you think there is an issue on the page. Bot or low-quality traffic that won't convert might negatively impact your marketing key performance indicators. 7. Reduced Website Performance You probably already know that a poor website speed can destroy your conversion rates and cause more shoppers to abandon their baskets. For every additional second it takes your site to load, a 4.4 percent decline in conversion rate has been observed. And conversely, did you know that abandoned shopping carts might slow down your site, too? In rare instances, it might. When many people access your website, the number of things in their shopping carts can quickly grow to thousands, using server resources and slowing down the entire site. It leaves paying users with a frustratingly slow-loading site. Consequently, they will most likely visit your competitors' sites. It is especially true on Black Friday and immediately following the release of a brand new product. Other site visitors will have a dreadful time as a result. Conclusion The consequences of unchecked online shopping carts can be disastrous. Abandoned shopping carts are harder to retrieve, making it more difficult to win back clients who have already left your eCommerce site. Therefore, you need to work on decreasing the number of shoppers who abandon their carts so you can capitalize on those opportune times. At Saffron Edge, our technical experts will analyze the root cause of cart abandonment and fix the issues. 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Why Is Cart Abandonment One Of The Biggest Pet Peeves For DTC eCommerce Businesses?
A major issue for merchants and DTC eCommerce business owners are abandoning online shopping carts. As a store owner, abandoning carts is a huge drain on your business's profits and a major source of frustration. Over 70% of online purchases remain unsuccessful due to customers leaving their carts unattended. Source: Pexels That's a lot of people. You can reclaim 70% of sales by recalling them to their cart. Everyone would be doing it if preventing customers from abandoning their online shopping carts was as simple as a few clicks. While there may not be a simple "one-fix answer," there are various efficient techniques to assist your Direct to Consumer sales by bringing customers from shopping to checking out and placing orders. You may consider a cart abandonment strategy as a part of your D2C marketing strategy. 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Source: Pexels As a result, more customers abandoned their online shopping carts before checking out, while an even greater number did not even attempt to add anything to their virtual shopping carts. It's understandable why more online merchants are considering cart recovery. What is Cart Abandonment, and How Do You Know it's Happening? It's deemed "abandonment" when a visitor to your website leaves a page before completing the required action. That means every page of your website with a call-to-action has an "abandonment" rate. In the case of shopping cart abandonment, or "basket abandonment," an item is put into a digital shopping cart, but no payment is made. After an item has been placed in the shopping cart, the consumer can change their mind or get upset and leave, which can happen for various reasons. It may have been because the shipping prices were too exorbitant, the delivery time was too long, or the checkout process was too lengthy. Source: Pexels To get your website or D2C eCommerce brand’s abandonment rate, you'll need to divide the total number of completed transactions (orders) by the number of abandoned shopping carts. Depending on where you acquire your site's analytics, one can access these numbers from various sources. Use Google Analytics to keep tabs on how your website is doing. Most experts advocate checking your cart abandonment rate at least twice a month if you want to remain on top of any major issues and make necessary corrections. Customers quit shopping carts for various reasons, many of which you have no power to influence. If you implement cart abandonment solutions and maximize your audience's engagement, you may significantly reduce cart abandonment and increase your online store's profitability. Don't forget: The best way to prevent cart abandonment is to ensure it doesn't happen at all! If this happens, your only option is to try to win back any clients you've lost in the future. It's vital to understand your customer's point of view to address most of the causes of cart abandonment. To better comprehend your customers are going through when they shop at your online store, you need to put yourself in their shoes. Source: Pexels Authenticity and trustworthiness are extremely important considerations for many online customers. Why? Because the vast majority of people making purchases online have never had the opportunity to hold your product. It's much more critical that customers trust you as the store owner or vendor to deliver a decent, legitimate product if it's a digital one. Your online store and checkout process will impact Direct to Consumer sales more if you incorporate social proof, such as real customer testimonials, into the design and functionality. The stakes go much greater after your user reaches the checkout page; thus, the modifications to your website and entire experience are even more critical. You can rapidly lose the trust of your target customer if your checkout procedure is complicated or if the general look and feel of the checkout pages differs from the rest of your website. Customers will abandon their carts if the checkout procedure is too long; therefore, you'll have to play defence with abandonment cart recovery if your checkout process is too long. The Most Common Reasons Why Customers Abandon Their Shopping Carts Since one can easily remedy most of the ten reasons cited in the Baymard study, we'll focus on the top four, with the possible exception of shipping prices. However, one can argue that high shipping costs can be alleviated by offering customers flat-rate shipping, a discount, or a minimum order amount to qualify for free shipment. First and foremost, high shipping expenses. Having to register an account to view content. A lengthy checkout procedure. Costs that aren't immediately apparent. How To Reduce And Recover Abandoned Shopping Carts In The Most Efficient Manner Possible Optimizing your checkout and cart recovery processes can reduce shopping cart abandonment rates. Please read on for details on 4 of the most successful techniques. Resend checkout recovery emails to customers. Make the checkout procedure easier. Offer a deal to encourage them to return. Make it possible for guests to check out. Final Thoughts While we focused on the four most common reasons for shopping cart abandonment, it's crucial to analyze the bigger picture. All the major issues identified in the Baymard study should be familiarized with and addressed. Many abandonment issues can be traced back to each other if you don't include window shoppers and tire kickers. The pieces reveal a bigger story when they are put together. When other roadblocks like website faults, lengthy delivery timeframes, and a poor or nonexistent return policy are coupled, the lack of free shipping may be what prompts a consumer to abandon their cart. Potential to recover some of those abandoned carts is enormous. You may recoup some of those missed Direct to Consumer sales by sending recovery emails with creative subject lines, offering incentives like discounts or free things, and ensuring that the checkout procedure is simple, mobile-friendly, and secure. For more details, contact our D2C eCommerce experts! ...
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