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Calculate and Increase Lifetime Customer Value of Your Business

What do you do when you are trying to attract more customers to your business?

Specifically, what metrics do you use?

Let me tell you what most business owners do.

Firstly, they aim to get as many customers as possible.

Then, they research for the cheapest way to do so.

Are you guilty of doing this too?

Ideally, this results in many new customers.

However, this method has a major flaw.

It is not sustainable in the long run.

This is where the customer lifetime value plays an important role.

Let’s find out more about it.

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So, What Is Customer Lifetime Value?

This metric measures how much your customer is worth.

Specifically, it predicts the value that a business receives from a single customer relationship.

This metric is precise.

Lifetime Customer ValueHowever, no one knows how long these relationships last.

Therefore, you must estimate it.

Hence, the customer lifetime value will be a periodic value.

For example, in terms of 12 months or 24 months.

Have you ever heard of the Pareto Principle?

Under this principle, it states that 80% of your revenue comes from 20% of your customers.

The percentage won’t always be 80/20.

However, the reasoning behind it stands.

There are some customers worth more than the others.

Therefore, you must identify these valuable customers.

This can help you maximize your customer acquisition value.

Why Is Customer Lifetime Value Important?

The importance of this metric lies in one important fact.

Not every customer is created equal.

But businesses tend to generalize their customers.

As a result, businesses provide the same level of service to each customer.

Unfortunately, this is not a realistic goal.

Every customer is unique.

Hence, the customer lifetime value must be calculated.

Let’s analyze why this metric is important.

– Generate Real ROI

Customer lifetime value helps you narrow down your strategies.

You can identify your most profitable customers.

Many business owners have a short-term mindset.

This relates to the gross profit of the initial purchase.

With customer lifetime value, you think of the long-term value.

However, the customers may not bring much profit now.

But they will rake in the profits in the future.

Hence, customer lifetime value lets you see the bigger picture.

Also, you can target your customers better.

Moreover, you can identify the demographics of your best customers.

This is an actionable insight that helps with your marketing strategies.

In fact, it gives your business a competitive edge.

This is because you use data-driven insights from customer lifetime value.

Ultimately, you understand what you should spend to acquire customers.

– Improve Marketing Message

What makes a customer buy a product?

This is known as a behavioral trigger.

So, you’ve identified your best customers.

Now, you can build accurate customer profiles.

This includes their likes and dislikes.

Small details make a difference.

It gives your strategy a personal touch.

Hence, find out what made them buy their first product with you.

Then, replicate the behavior with prospective customers.

Inherently, customer lifetime value produces actionable insights.

It helps you spend your marketing dollars wisely.

Then, you can obtain maximum customer lifetime value.

–  Enhance Retention Efforts

How do you determine the value of your marketing campaign?

For some, they measure it in terms of instant revenue.

This is a mistake that many businesses make.

Instead, they should consider the impacts.

Ultimately, the goal of a business to be profitable.

An important factor to this is loyal customers.

Identify if the marketing strategy impacted the customer lifetime value.

Positive changes lead to customer retention.

In the long run, customer lifetime value helps you manage customer relationships better.

How Can You Calculate Lifetime Customer Value?

There is no need to get too complicated with the lifetime customer value.

In fact, you will find that there are different methods to calculate this metric.

Here’s a step by step guide on how to calculate lifetime customer value.

1. Find the Average Order Value or Revenue

Do you have any previous sales data?

If you do, you’re off to a good start.

If you don’t, don’t worry because there are still ways you can do this.

In a business, you may have different segments of customers.

Although so, you may also have an unsegmented market.

The larger the sample, the better.

This makes the result more accurate.

In this step, identify the average amount a customer spends in a transaction.

Find your total revenue.

This can be from a specific customer segment.

Also, you can use the total revenue from the market as a whole.

Then, divide it by the number of orders.

If you offer discounts, use the normal price.

This is a good place to start for customer lifetime value.

Average Order Value = Total Revenue / Number Of Orders

2. Estimate the Purchase Frequency

In this step, the term purchase cycle is important.

It determines how often a product or service is bought.

The purchase cycle depends on the industry.

For example, desktops have a 2 to 4 years purchase cycle.

Meanwhile, Shopify monthly users purchase 12 times a year.

In short, purchase frequency is the average amount of orders a customer places.

Therefore, divide the total number of orders by the total number of unique customers.

Purchase Frequency = Total Number Of Orders / Total Number Of Unique Customers

3. Calculate Revenue per Customer

Here is the final step.

You will now calculate your customer’s worth.

Simply multiply the average order value by the purchase frequency.

Let’s take a look at this example.

The basic Shopify package is $29 per month.

For calculation purposes, we will ignore the transaction fees.

Therefore, the expected revenue will be $29 x 12 = $348

Let’s assume that Shopify has a three years customers lifetime.

Then, calculate the customer lifetime value.

Now, it will be $29 x 36 = $1044.

If you are unsure of the customer lifetime period, stick to conservative values.

Customer Lifetime Value = Average Order Value X Purchase Frequency

How to Increase Lifetime Customer Value?

This is an important metric for many businesses.

In fact, its implementation is important.

However, keeping the success going is also vital.

Here are five strategies to increase your lifetime customer value.

  1. Build long-term relationships
    • Use multiple channels to communicate
    • Learn more about your customers
  2. Build brand loyalty
    • Reward your customers
    • Focus on what you do best
  3. Provide excellent customer service
    • Increase customer service channels
    • Be responsive
    • Admit your mistakes
  4. Make quality a priority
  5. Re-engage customers
    • Write an email
    • Provide an incentive
    • Make them feel valued

Now, let’s analyze every point in detail.

1. Build Long-Term Relationships

Businesses must think about how relationships are formed.

How do people form a relationship?

At first, people will start with casual talk.

It’s important to feel comfortable around one another.

Only then, this will evolve into casual relationships.

Depending on the level of trust, this will grow into a long-lasting relationship.

This process also applies to business.

Long-term customer relationships do not happen overnight.

Instead, it may start off with marketing strategies such as retargeting ads.

Here are three ways your business can build better relationships.

– Use Multiple Channels to Communicate

Think about ways you can improve the customer experience.

How do you deliver your brand experience better?

We are in a technology-driven age.

Businesses must keep up.

Hence, identify which channels your customer prefers.

Then, meet them there.

Make it easy for your customers to communicate with your brand.

Today, there are three powerful social media platforms.

They are Facebook, Twitter and YouTube.

As customers switch from one platform to another, how can you appeal to them?

To do this, the process needs to be seamless.

If implemented well, your customer lifetime value can be improved.

– Learn More About Your Customers

Customers are central to businesses.

Therefore, learning more about them is important.

Going the extra mile makes a big difference.

Continue the conversation even after a completed transaction.

Connect with them on LinkedIn.

Find out what they are passionate about.

Think about how you can add value to their lives.

Solve a real problem.

This helps your business to stand out.

In business today, it is not so much about delivering a product or service.

Instead, it is about delivering an experience.

Therefore, this will create a higher customer lifetime value.

2. Build Brand Loyalty

Customer lifetime value revolves a lot around brand loyalty.

It helps to retain customers longer.

After all, retaining a customer is cheaper than acquiring a new one.

Therefore, the efforts you spend on building customer lifetime value is worth it.

Here are several common methods to build brand loyalty.

– Reward Your Customers

Rewards must be a part of your marketing strategy.

This relates to loyalty programs.

By nature, people like feeling appreciated.

Naturally, you need to invest in establishing a loyalty program.

However, it pays off in the long run.

Promote your loyalty program on your website.

Typically, customers have to accumulate points.

Then, this can be a discount for future purchases.

Make sure that the rewards are valuable to them.

This step is important in an increasingly crowded industry.

Customers have more choices when it comes to product or service providers.

When doing this, use the element of personalization.

Hence, this can increase customer lifetime value.

– Focus on What You Do Best

To attract more customers, businesses often make a big mistake.

They try to be anything that can appeal to customers.

However, they should stick to what they know best.

This helps the brand image to stay consistent.

When pursuing brand loyalty, be bold and unique.

Know your brand’s strengths.

Use that to your advantage.

Take for example the consumer electronics industry.

Apple is known for its premium-priced products.

It does not try to meet every customer demands out there.

Instead, it uses its brand appeal to attract customers.

3. Provide Excellent Customer Service

Customer lifetime value increases with good customer service.

This is part of the customer experience with your brand.

In fact, it also increases word of mouth advertising.

Here’s how you can improve your customer service strategy.

– Increase Customer Service Channels

Today, more businesses are using Twitter as a customer support platform.

For instance, many airlines are using it to resolve customer problems.

While this is effective, businesses must think outside the box.

Make customer service visible on your website.

State clearly how they can contact you.

More importantly, make sure the phone number, emails or live chats are responsive.

In fact, websites often use pop up chats that are convenient for customers.

To avoid repetitive questions, create a frequently asked questions page.

– Be Responsive

Customers want a reply, fast.

Even if you don’t have a complete answer, get back to them on the same working day.

Make sure they know what is going on.

Let them know when they can expect a follow-up action.

Assure them that their issue is being resolved as fast as possible.

– Admit Your Mistakes

We are all human.

Therefore, admit it when you made a mistake.

Don’t deny it.

In fact, don’t try to make excuses.

Apologize.

Then, do your best to solve the issue.

Give them a good discount or in-store voucher to apologize.

Even if you don’t have to, it makes a difference.

4. Make a Quality a Priority

Quality speaks volumes.

Keep improving the quality of your products and services.

Customers like to feel that their money is worth the purchase.

If they are confident in your product, they will talk about it more.

Let’s look at Apple.

This is a powerful electronics brand.

They are a perfect example of a brand which has garnered high customer loyalty.

Despite criticism, their products continue to improve over the years.

New features are added for every release.

As a result, Apple customers often anticipate for new products release.

This shows how much Apple has built their brand quality.

Think about it.

Apple can command a lot of media attention.

This is easy to do in the first few years.

However, to live up to the hype is another challenge.

In fact, Apple successfully exceeded their customer’s expectations.

Apple has successfully created a loyal customer base.

One of the ways they do this is through their high product quality.

Together with media attention, Apple is unstoppable.

In fact, Apple customers are very loyal.

There is an important lesson from Apple’s success.

To build a business, you must do more than your consumers expect.

Loyalty cannot be given to you freely.

Instead, it is something that you must earn.

Therefore, establish your brand and services quality.

If you notice any quality decline, quickly take corrective actions.

Monitoring the quality of your products is also important.

Take into consideration your customers feedback.

After all, they are the main consumers of your offerings.

5. Re-Engage Customers

Pleasing everyone is impossible.

Furthermore, customers have certain expectations for a business.

However, businesses don’t always live up to those expectations.

This leaves customers feeling disappointed.

Hence, this decreases the customer lifetime value.

There are many reasons why customers end up leaving a business.

Perhaps they received poor customer service.

They may have found another comparable offering to yours.

Also, they may feel that you are offering lacks critical features.

Here are a few ways you can re-engage with these customers.

– Write an Email

It is important that you identify what caused them to leave.

To do this, write a personalized email.

Reach out to them.

Write a brief description of your brand.

Then, ask them to fill out a survey or get back to you.

Don’t make the email too long.

– Provide an Incentive

When asking for feedback, you must give them a good reason to do so.

One of the best ways to do this is to provide an incentive.

However, don’t just provide a $5 or $10 discount.

Instead, think of a valuable reward.

Provide a reward which reflects the importance of the feedback.

– Make Them Feel Valued

There are different ways for you to re-engage with past customers.

Whichever method you choose, remember to make them feel valued.

Ultimately, a business has to increase customer satisfaction.

Just because their sales number are good, it doesn’t mean that customers are satisfied.

In fact, customers are quick to leave if the quality of a product decreases.

From here, it will not be easy to recover.

Try to avoid making customers unhappy.

Hence, identify any weaknesses before they damage your brand’s reputation.

Wrapping Things Up

In the business world, it is easy to overlook customer lifetime value.

Businesses often go after instant profits.

In a few years, this approach is unsustainable.

Instead, customer lifetime value creates a long-term mindset.

In fact, the success of this strategy highly relies on you.

So, you need to develop long-term and short-term tactics to make customer lifetime value work.

It maximizes the value of customer relationships.

Also, it builds brand loyalty.

More importantly, it adds a personal touch to marketing.

This important metric allows you to identify your most valuable customers.

From here, you can strategize your marketing efforts better.

Keep in mind that not every customer is equal.

Today, few companies are investing adequately in customer lifetime value.

In other words, your competitors may not be paying attention to this area.

Therefore, get into the customer lifetime value to increase your competitive edge.

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