Marketers and managers spend time, effort, and resources tracking the entire customer journey to improve content and deliver the best customer experience.
However, many of them rely on unreliable results, such as a one-time sale or an upsell. Companies that want to ensure their long-term success, on the other hand, must look at the big picture. This means that they include Customer Lifetime Value (CLV) in their strategy. Amit Chauhan.
What is customer lifetime value?
Customer Lifetime Value (CLV) is a primary metric for understanding your customers. It allows you to estimate the profits that a relationship with a customer could bring to your organization and, therefore, to assess the profitability of your marketing initiatives.
The development of the VVC allows you to design an effective marketing strategy and plan your budget well. However, it must be taken into consideration that some clients bring in more than others. It is therefore crucial to identify beforehand which customers you should target and retain.
Since it is impossible for you to predict the length of your relationship, you can estimate and report the CVV as a periodic value. Depending on your sector of activity, you can calculate it for different maturities, but it is generally fixed for a period of 12 or 24 months.
Why You Should Calculate Customer Lifetime Value (LCV)
One of the main reasons for measuring VVC is to build customer loyalty. According to marketing indicators, the probability of selling to a prospective customer is 5-20%, while the same indicator rises to 60-70% when selling to existing customers.
This means that promoting sales to loyal customers would be much more profitable. This also highlights the importance of customer retention: repeat customers tend to spend more on your products, helping to expand and promote your business. According to a survey (The state of Customer Lifetime Value report), 81% of marketers say that tracking HCV drives sales.
Yet your customers are not equal in terms of revenue per customer, cost per acquisition, and other metrics. By calculating the VVC, you can therefore better assess how much you should spend to retain your customers. It also allows you to set marketing goals, plan spending to reduce acquisition costs, and maintain a high retention rate.
Additionally, with VVC, you are able to distribute more resources to encourage customers to spend more during their relationship with your brand.
The VVC allows you to observe more closely the financial health of your company because its calculation requires the consideration of a longer period. As a result, you are able to more accurately determine whether your current acquisition and retention strategy is designed for quick wins or for steady, sustainable growth.
Finally, customer lifetime value provides you with necessary information about your users and customers. Indeed, it allows you to answer some key questions, such as:
- How much should I spend to acquire a customer?
- How much should I invest to retain or win back my customers?
- How much time should my sales and marketing team spend on customer acquisition?
- Are my offers well suited to the needs of my best customers?
What You Need to Calculate Customer Lifetime Value (LCV)
First, you need to fully understand your customer journey. You can track it using the analysis of customer behavior and experience data across multiple touchpoints, such as your website, mobile app, and digital products.
Collecting consumer data along the journey often involves personal data, information that identifies individuals. These, on the other hand, are subject to different privacy regulations and require appropriate treatment to find out more, see our article: 10 new privacy laws around the world.
If you want to collect and process this data in a way that complies with regulations, you will need privacy-friendly analytics (What is privacy-friendly analytics?). That is, methods of measuring and analyzing data that both respect individual privacy rights and provide relevant information.
If you obtain consent from your site visitors and product users, you gain more detailed information which you can use for a variety of purposes, be it analytics, conversion tracking, or remarketing.
In some cases, this anonymous data will already allow you to estimate the VVC. However, if you add personal data to it, your VVC calculations will be much more reliable.
For example, adding a Customer Data Platform to your current analytics stack will provide you with the personal data connections you need to calculate VVC more accurately. This allows you to merge all data from multiple online and offline sources, such as a CRM or transactional system.
How to calculate customer lifetime value
If you want to calculate the VVC, you can do so using several formulas. Your choice depends on the resources you have. But once you choose one, stick to it.
We are going to present you a relatively simple and a more traditional one. Additionally, you can also distinguish between historical VVC and predictive VVC. We will present them to you in more detail in the following sections.
But first, you'll need the following clues:
- Customer lifetime
- Retention rate
- Customer churn rate
- Average profit margins (per customer)
Historical Customer Lifetime Value (LCV)
Historical CLV is the sum of all gross margins from a customer's past purchases. To calculate it, all the gross margin values must be added up to the last transaction (N) made by a customer. Measure CVV against net profit to get the actual profit generated by a given customer. This involves the costs of service, return, marketing, acquisition, etc.
The downside is that you may have to do complicated calculations at the individual level to get the most up-to-date data. Nevertheless, the VVC gross margin gives you a deep understanding of your customers' profitability to date.
Where: AGM = Average Gross Margin
In principle, this method is convenient if customers share the same preferences and interact with your brand in the same way over a period of time.
However, keep in mind that calculating historical VVC means putting all customers (old and new) in the same basket. As a result, the analysis of the results is tricky, because they can vary in terms of behavior and preferences. These differences between clients can subsequently affect the predictive VVC.
Predictive Customer Lifetime Value (LCV)
The goal of predictive VVC is to model the transactional behaviors of your customers in order to predict the actions they will take in the future. It is an excellent indicator of VVC, better than historical VVC.
The predictive model uses algorithms that attempt to generate an accurate VVC while predicting a customer's total value. Such a calculation works on the basis of a history of past transactions and actions of the client.
That said, please note that you can choose from different VVC plans. We have decided to present a relatively simple one for the sake of clarity.
Here is the formula:
Where:
T = Average number of monthly transactions
AOV = Average purchase amount
AGM = Average gross margin
ALT = Average customer lifetime (in months)
To calculate AOV and ALT in easy way, integrate an analytics platform and a customer data platform with your CRM.
Please note that this measurement is only a prediction and will therefore not always be 100% accurate. To improve the accuracy of your VVC calculations, consider the characteristic of your industry. Indeed, more precision in the estimation of the VVC translates into the development of more judicious marketing strategies.
Traditional Customer Lifetime Value (LCV)
If your annual sales are not stable, a more traditional but also more in-depth VVC formula may work better. To use this, you will need the discount and retention rates, as well as the average gross margin per customer lifetime.
Here's what your final formula will look like:
Where:
GML = Gross Margin per Customer Lifetime
R = Monthly Retention Rate
D = Monthly Discount Rate
This formula highlights possible variances in revenue generated by customers over a given time period. Then, the result of each year is corrected by a discount rate to take inflation into account.
How to Implement Customer Lifetime Value (CLV)
Once you have calculated your VVC, you can use it to build your strategies. Here are some application examples:
- Segment your customers effectively: Using VVC model, you can perfect both profiling and segmentation. How to achieve it? Personalize your offers, target customers based on their potential value, improve forecasts and conversion rates, to name a few application examples. But the list is much longer. For now, you can also increase the effectiveness of your segments with collected data exported from different sources to technologies such as customer data platforms.
- Maximize Acquisition: Experts from the ALTA Cooperative emphasize that predictive VVC allows you to increase acquisition by helping professionals ensure acquiring subscribers who will represent the greatest lifetime value in the future. . »
- Increase your retention rate: The VVC is a compass that guides you through the next steps of retaining customers for your brand. It helps you set priorities, such as determining which customers you should win back and designing a unique strategy to get there.
- Perfect your forecasts: Calculating the VVC helps you forecast the demand for your products or services in the future. With this information at your fingertips, you can manage your investment in terms of labor, inventory, or other resources. Detailed forecasts are vital to reducing productivity losses and allocating resources more efficiently.
- Recognize your best customers: Data about your customers, such as frequent purchases and transactions, allows you to identify those who spend the most and spot which products to promote more heavily. You can invite customers to special events and tailor offers to those customers who provide the most value. Finally, you can better address their needs by providing them with an individual assistant or advisor.
6 steps to boost the amount of customer lifetime value (CVV)
Let's think about what you can do to give your VVC a boost. We'll walk you through some of the steps you can take to build customer loyalty by giving them a better experience.
1. Take advantage of first-party data
Since you are feeding your VVC with data, it is crucial that the data is of high quality. To get them, you should favor first-party data (to find out why, see our article: Why first-party data is the most valuable to marketers). Since this data comes directly from your customers, it is more accurate and provides you with details about consumer interactions on your website or app, such as form submissions, product views, and site search queries. You'll need this information to improve content personalization and recommendations, as well as to activate audiences and refine up-sell and cross-sell initiatives. In fact, a carefully tailored user experience dramatically increases revenue and VVC.
2. Optimize integration
It is vital to ensure that your customers have a positive first experience with your products and services. Indeed, a smooth integration process supported by supports (for example video tutorials) encourages customers to use your product and to come back to it often. This translates to higher customer lifetime value in the long run.
3. Prioritize customer service
It is essential to take care of your customers before and after they make a purchase. How to get there ? By allowing them to feel comfortable with your product, by remaining proactive and answering any questions in time. Plus, your support team can also address customer needs with personalized training and how-to self-help guides. It's all worth the effort: according to Microsoft, research for 90% of Americans, customer service is one of the major factors that determines the choice of a brand.
4. Increase average order value
Another way to grow CVV is to increase the average order value. You can achieve this by relying on upselling and cross-selling methods. The next time your customer makes a purchase, you can offer them a complementary product to the ones they are about to buy.
5. Ensure good communication
Good communication with your customers is about knowing their needs, actively listening and building rapport. It's also about taking all your customers' feedback into consideration, providing them with explicit answers to their technical questions and adapting the communication channels according to their preferences.
6. Stay competitive
The world is changing rapidly, and so are customer expectations and desires. This is why, in order to retain customers for your company, present them with an offer that will be relevant (in the sense that it will meet their needs) and well competitive with the services or products available on the market.
Create lifetime value
The VVC is one of the indispensable measures to adopt a data-driven approach. However, it should be one of the components of your strategy, not its only objective.
Improving your VVC takes more effort than better customer service and a relevant offer. If you want to be successful, you should change your perspective of consumers, seeing them “more as value-creating partners than as value-extraction targets,” as Michael Schrage notes in his article What Most Companies Miss About. Customer Lifetime Value The researcher explains that, yes, customers become more valuable when they give you great ideas, cooperate with you, share their data, try your new products, and promote your business.
But they provide you with even more information when they request new features, share their experiences using competing products, and contact your customer service.
Article By : Amit Chauhan
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