Acquiring new customers costs time and money. Whether you’re running online ads, paying a marketing agency, creating email campaigns or investing in a lead-generation website, customer acquisition can be a large investment.
A profitable business needs to ensure that they generate more revenue from the majority of their customers than the cost required to acquire and retain them.
In this article, we’re going to discuss the concept of Customer Lifetime Value (CLV), which is the amount of revenue a customer generates minus the cost of acquiring and retaining them.
We’ll also look at ways to increase your customer lifetime value through customer retention and smarter selling.
In this article
What is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) is a metric that’s used to measure how much revenue a customer can generate for the business over their lifetime (between their first and final purchase).
CLV is an important metric to track because it helps businesses to identify their most profitable customers, which can be used to inform future marketing and sales strategies, as well as budget planning.
CLV is particularly useful when you begin to use it to segment your customers. For example, a customer who makes a one-off purchase or remains very inactive might be seen as a low priority for you. However, a customer who purchases often should be considered a high priority for retention.
How to calculate Customer Lifetime Value
Calculating customer lifetime value is fairly straightforward, but there’s a caveat to be aware of. To calculate CLV, use the following formula:
CLV = (Average Order Value x Average Transactions Per Year) x Average Retention Time in Years).
For example, imagine you’re a business owner selling perfume. An average customer spends £40 on a bottle of perfume, and they buy from you twice per year. You know that, generally, customers should stay with you for about five years.
To calculate the CLV, you would make the following calculation:
(40 x 2) x 5
CLV = £400
However, the aforementioned caveat is that this calculation doesn’t account for the costs associated with obtaining and retaining your customer. To get the full picture, it’s important to work out how much it costs your business to acquire a customer and ensure they remain active. You should then subtract those costs from your CLV.
Tips for increasing customer lifetime value
Increasing CLV requires a combination of smart selling and customer retention strategies. Fundamentally, you want to encourage customers to spend more money with you while also offering great value, service, and incentives for them to keep returning to your store.
Here are some ways to maximise customer lifetime value.
Create memorable customer experiences
One of the best ways to keep customers coming back over time is to stand out from the crowd. To do that, you need a differentiating factor that gives customers a reason to come back again and again.
There are many ways to do this, and it usually starts with your brand. Strong branding across your website, social media, packaging and each and every one of your touch points can result in experiences that cement loyalty.
Whether that’s through interactive media on your website, unique unboxing experiences, or attention-grabbing marketing campaigns, use your band as a foundation to make your business unforgettable.
Upsell and cross-sell
Upselling is a sales technique where a seller encourages the customer to purchase more expensive items, upgrades, or other add-ons in an attempt to make a more profitable sale. It involves persuading customers to buy a higher-end version of the product they are interested in or to add features that complement their purchase.
On the other hand, Cross-selling is a sales strategy where a seller suggests additional, complementary products or services to a customer who is already making a purchase.
Unlike upselling, which encourages customers to buy a more expensive version of the item they’re interested in, cross-selling focuses on selling related products that enhance the use or enjoyment of the primary product.
Upselling and cross-selling are tried and tested sales tactics that have been used since the earliest days of commerce.
These tactics have continued to be used throughout the transition to eCommerce, and with the aid of tools and technology, it’s never been easier to encourage larger spends from your customers.
Encourage feedback (and act on it)
Taking the time to request, listen, and act upon customer feedback is important for keeping customers happy and engaged. Not only will this help you to build relationships, it could help you improve your business offerings and service levels.
Showing empathy, understanding and a desire to improve can go a long way, and even turn bad situations into positive ones. It helps customers to understand there are people behind the business, oftentimes making relationships more than just transactional.
Ultimately, having an honest, open dialogue with your customers through good times and bad can make them customers for life.
Nurture your community
Building and nurturing your community is another surefire way to build loyal customers who will spend more with you. You should endeavour to build a community where each customer feels like part of something bigger and something shared – rather than just a number on a sheet or a tool to line your pockets.
There are many online places to build communities, with the most appropriate places dependent on your target audience. From TikTok to Instagram, Discord to Reddit, find a place where you can share content, opinions, and other useful information with your customers in a more informal, community-like setting.
Sell on multiple channels (omnichannel)
There have never been more places to sell online, and to give your customers the most opportunities to buy from you, you should aim to have a presence on as many online storefronts as possible. Creating a seamless omnichannel strategy can take a lot of work in the beginning, but the rewards are worth it.
Customers expect to be able to buy from you on the platforms they’re using the most, whether that be Amazon, TikTok, or Instagram. While having a highly converting website is important, you need to be everywhere to be competitive.
At James and James Fulfilment, we make it easy for eCommerce brands to sell across multiple channels with our award-winning inventory management platform, ControlPort. You can manage all your channels in one place, with out-of-the-box integrations for all leading online channels.
Run an efficient fulfilment operation
Probably the most effective way to increase your customer lifetime value is to have in place an accurate and efficient fulfilment operation. As your business grows and you win more customers, it can become increasingly difficult to fulfil orders accurately and in good time.
However, it only takes one order that’s packaged incorrectly or takes too long to arrive for your customers to lose faith and move on. This is especially true if a customer is ordering from you for the first time.
Trust needs to be earned, and if customers know they can rely on you to fulfil their orders efficiently, accurately and faster than the competition, they’ll be more likely to keep coming back for more.
Maximise Customer Lifetime Value with James and James Fulfilment
Scaling a fulfilment operation is complex, but it doesn’t need to be. Here at James and James, we provide outsourced fulfilment solutions to eCommerce businesses across the world. With fulfilment centres in the UK, EU, USA and Australia, we can help you offer quick, affordable, and accurate shipping to customers worldwide.