As the economy becomes more and more customer-oriented, providing the highest quality customer service has become essential to retaining customers and increasing profits. By investigating various market parts and their customer lifetime value, firms can strategically target the best customers to keep them, improve their services, and attract existing customers. So how do you measure and increase customer lifetime value, and why is it so important? Let’s find out!
Customer lifetime value (CLV) estimates the sum of profits a company hopes to achieve throughout its relationship with a given customer. More specifically, this marketing concept corresponds to the sum of the gains made over the customer’s average lifetime, the average time that the company retains the customer. It is a handy economic indicator that allows a company to determine how much its customers are earning and, therefore, how much it can spend on acquiring new. In addition, CLV also enables a company to estimate the value of its customer portfolio and, hence, its real value. A more precise valuation is an excellent argument in the event of a sale of the company or the context of negotiation after a takeover offer.
Why is customer lifetime value so significant?
Understanding how much your clients can bring to your business determines how you can attract and retain them. In addition to the CLV, when you calculate the cost of customer acquisition, you have a basis for measuring the ROI of customer acquisition. Instead of relying on generalities or the famous rule that “acquiring new customers costs 5x more than maintaining them”, making calculations yourself will allow you to establish a precise framework for your actions.
The evolution of the market pushes towards an increase not only of the competitive offer and the reduction of the natural market shares (or catchment areas). In addition, a leverage effect leads to an increase in advertising and marketing budgets. We must therefore redouble our efforts to find new customers. At this price, customer value becomes essential for controlling the profitability of its commercial strategy and developing its economic performance indicators by supporting the customer over time, thanks to better loyalty.
How to measure customer lifetime value
Calculating the CLV can be done in different ways. Still, the most straightforward formula is to multiply the average sales value by the average number of sales by the average length of the customer relationship. It can thus be written in the following form:
CLV = (average sales value) x (average number of sales) x (average length of customer relationship)
Knowing that :
- The average value of sales, expressed in euros, is calculated per customer and year.
- The average number of sales is calculated per customer and year.
- The average duration of the customer relationship, expressed in years, is calculated per customer.
For example, imagine a bakery where customers come four times a week and spend 5 euros each time. If they frequent this bakery for seven years, the customer’s lifetime value equals 4 euros x (4 x 52 weeks) x 7 years. In this case, the CLV is 5,824 euros. But, in practice, math isn’t always that easy. First of all, it is not simple to estimate the average consumption. In our example, the baker would have to keep regular statistics for each of his customers. In addition, this calculation does not hold. Take into account environmental factors, which do not depend on the company or the competition.
Some companies calculate several CLVs according to their customers’ different profiles or habits for more precise calculations. Making such differences allows a genuinely customer-centric approach, better customer relationship management (CRM: Customer Relation Management), and a more precise company valuation.
How to increase the customer lifetime value
Customers are more demanding, better informed, can compare quickly, and are much more easily picked up by the competition. Based on this observation, it is vital to building customer loyalty by continuously adapting your product and service offering.
THREE LEVERS TO DEVELOP CUSTOMER VALUE:
- Communicate regularly
You need to show your news to your customers (and prospects) by newsletters, e-mailings, or animations of your social networks. The new product, promotions, participation in an event, the mood of the day. The rule is simple:
- Keep in touch so as not to be forgotten.
- Occupy the space so that your customers do not turn to the competition.
That is an undeniable and concrete advantage of a close and qualitative commercial relationship: the customer then prefers to wait to buy your product rather than purchasing a product already available elsewhere on the market. Its customer value is thus naturally significantly increased.
Innovating is expensive but can rely on customer feedback to reduce marketing costs and identify customer expectations while giving a sense of importance to every customer consulted. Not to mention that sometimes it is possible to extract great ideas contributed for free by a client. Fostering contact, allowing implicit or informal exchanges around lunches, and thus supporting feedback is an excellent innovative business strategy.
Create a value chain
To keep your customers, try to meet all of their needs/issues. Identify business partners who offer products or services that complement yours. Together, you will cover many more customer demands and reduce the risk of “escape” from the competition.
Implement machine learning algorithms for marketing
You don’t have to do all the math yourself, using artificial intelligence and machine learning algorithms to improve and refine your CLV measurement. Not only can AI help calculate and enhance a customer’s lifetime value, but it will also force marketers to use CLV as their main KPI. By processing and interpreting vast amounts of data throughout a customer’s lifetime, AI helps marketers make indicator-based decisions to align their strategies and encourage customers to:
- Make purchasing decisions faster
- Buy more goods
- Become loyal customers or brand ambassadors
While marketers have improved their ability to relate marketing investments to revenue impact, many are not taking the next step: calculating CLV. With AI, you can predict CLV with increasing accuracy. And when you use AI to improve the value you provide to customers, they return it by purchasing additional products, taking on longer engagements, and referring your organization to friends and colleagues.
For more information, visit https://addepto.com/customer-lifetime-value-prediction-machine-learning/