Acquisition vs Retention
There are two main ways to grow your business: by acquiring new clients and by keeping your clients, making them lifetime customers. Based on current statistics, 44% of companies focus more on acquiring new clients while only about 18% focus on customer retention. If we take a company like Netflix for example, which bases their services on a subscription model, there is an obvious reason to focus more on customer retention; Netflix wants customers to continue subscribing! This is why we talk about Customer Lifetime Value (CLV).
What is CLV?
In marketing, CLV is the value of a given customer and it reflects their contribution to your business. CLV is a measurement of how valuable a customer is to your company throughout an unlimited time span, as opposed to just the first purchase. Simplified, CLV is an estimate of the revenue you can expect from a customer, if you keep that customer for a lifetime.
We mentioned the importance of customer retention already, but there is also the question of determining the value of that customer. This is done by calculating CLV. I don't want to go too much into formulas in this introductory post, but you can easily find a lot of CLV calculators online if you are interested in how to calculate it.
Why is CLV Important?
There are two primary measures of CLV: Predictive and Historic.
Predictive CLV is a projection of how much revenue a customer will generate for a business over the course of the customer relationship.
Historic CLV is the sum of all profits from a customer’s past purchases. This number is based on existing customer data for a specific period of time.
CLV is a great metric when you have a multi-year relationship with a customer. We already mentioned Netflix as an example, but it doesn’t apply only to subscription based services. In a subscription model, it’s a good method for spotting the early signs of attrition; for example, you may see spend dropping off after the first year as they use the subscription less and less. More broadly, CLV demonstrates the significance of repeat business and can help you shift your priorities accordingly.
How to Keep your Customers
Before you even start calculating CLV, you have to know how to keep your customers. I won’t go into much detail, but these are 5 basic points I think are very important in establishing your customer retention strategy:
1. Get to know your customer through customer analytics
2. Provide personalized service based on customer analytics
3. Consistently deliver high quality products / services
4. Provide outstanding customer support
5. Build effective loyalty programs
Providing customers with high quality products or services is not enough in to keep your customers. Personalization and customer analytics are closely related, because both personalization and the product/service itself are based on that data. For both acquiring the data and offering personalized content, you need to have a capable CRM solution in place. I personally find it very frustrating when some web shop suggests products to me that are totally unrelated to my buying history. In this case, bad personalization is worse than no personalization. Providing customers with personalized content and offers is critical to building Customer Lifetime Value. Today, marketers have access to so much data that it’s much easier than it was in the past to offer personalized product offers, promotions and more to specific customers or customer segments.
The importance of customer support is often underestimated, but it is frequently listed as one of the most common reasons why customers give up on a company. It is important to have as many channels as possible open for your customers to interact, but the speed and quality of the response is equally important. I recently had some experiences when I solved some problem or got some information before I got an official response to my inquiry this kind of experience is likely to drive your customers away. Regardless of whether your customers are addressing you directly or if you are addressing them, be sure to create human relationships and communication that look as if it were written manually and directed to just one person. Customers want to feel special and see that you care.
Loyalty programs are also a good incentive for customers to stay with a specific company, provided they feel they’re getting something from that program. Take care to set these up so that your customer doesn't feel like they’re being used in order to provide your company with more data about themselves.
How to Increase your CLV
Now that we’ve discussed how to keep your customers, let’s talk about increasing your CLV. One of the best strategies for increasing Customer Lifetime Value is to increase sales per order:to motivate customers to spend more money on every transaction.
The second strategy I’d like to offer for boosting CLV is to increase the number of sales your business closes over time. While the first strategy focuses on the value of each individual transaction, this strategy focuses on the quantity of transactions.
You can also reduce the overhead costs of serving your customers: this includes costs from packaging products for shipping, to answering customer service calls. Spending less to serve each customer increases the potential positive impact each transaction can have on your bottom line.
I’ll mention personalization again because it’s such a valuable tool for increasing CLV. You can use personalized, dynamic content on your website and in your email marketing so customers always see the offers that are most relevant to them. For example, it is good practice to show related products customers might be interested in when they view specific products on your website, or when they add certain products to their shopping cart. All of this is based on customers’ historic data, so I’m emphasizing the value of having the right CRM solution once more.
In this post, we’ve explained what CLV is and how it relates to customer retention. We also offered some tips on how to increase customer retention and CLV. So then, what’s the next step? At Coria, we can help you get on a path to increasing Customer Lifetime Value by helping you acquire more information on your customers and develop personalizations based on that data. If you want to find out more, feel free to contact us!