Building customer loyalty and increasing customer lifetime value (CLV) helps your business with long-term ROI. While many companies try to attract new customers, it’s just as crucial for companies to consider what brings customers back for more. One percent of e-commerce customers are worth 18 times more than your average customer.
Also, 80 percent of your long-term revenue will come from your most loyal customers. Based on this data, increasing customer retention and return visits can increase your revenue year-over-year.
Let’s take a look at how to calculate your CLV and learn more about what strategies work to increase long-term value for your customers.
Why Customer Lifetime Value Matters for Business
In the simplest terms, customer lifetime value is a measure of how much your average customer will spend over their lifetime with your business. This number is the total average amount that you can expect from customers, which can be broken down year by year.
Here is a quick look at the benefits of building CLV:
- Increases your customer retention
- Determines your business’ ability to scale
- Increases the ROI of your marketing strategy
- Shows you where you rank among competitors
- Provides audience insights for engagement, brand loyalty, and social proof (trust)
Ideally, businesses want customers that come back again and again to purchase new products, add-ons, or other additional services. Some companies only have one product, but when businesses develop lifetime value, they also look at new products and additional ways to serve their customers. This builds brand loyalty and ambassadorship.
Customers with higher lifetime value tend to visit a business often because they like the brand and its products. They probably share these products regularly and may also create testimonials or other content about a company to share how much they love the brand.
This is why it’s so important to pay attention to your customer, create evergreen content that helps your visitors, and develop marketing strategies to bring customers back to your website.
How to Calculate Customer Lifetime Value
There are a variety of ways to look at customer lifetime value. However, this approach works for most businesses.
1. Look at Your Average Order Value (AOV)
You can get this number by finding your total revenue during a period, such as for the quarter, then divide that number by the total number of orders received in the same period.
For example, from January 1st to March 31st, 2020, your revenue was $30,200. You received 105 total orders during the same period.
- $30,200 divided by 105 orders = $288
Your AOV for Q1 was $288.
2. Calculate Average Order Frequency
How many times on average did a customer purchase from you? This is called Average Order Frequency or Average Purchase Frequency.
To get this number, you’ll divide the number of total orders during a specific period by the unique total of customers during the same period.
- You had 105 orders from 25 unique customers over the past 90 days.
- 105 orders divided by 25 unique customers = 4.2 orders per customers on average
3. Calculate the Customer Value (Different from CLV)
This number represents what each customer is worth during a period. Using the same figures from above, we take AOV and divide by Average Order Frequency:
- $288 (AOV) divided by 4.2 (AOF)= $68.57
Your customer value is $68.57.
4. Calculate the Estimated CLV
Here’s where you’ll need to know the Average Customer Lifespan, which is particular for your business. Let’s say that customers stick with your business for at least 20 years.
To calculate your customer lifetime value, you would multiply your customer value by the customer average lifespan:
- $68.57 customer value by 20 years: $1,371.40
This means that the average CLV for your business is $1,371.40. You can expect that customers will spend this much over their lifetime doing business with you.
Strategies to Increase Customer Lifetime Value
Based on the metrics above, you need to increase your average order value or purchase frequency of current customers to improve customer lifetime value. However, that’s easier said than done. Most businesses will need a marketing strategy and a change in customer experience to bump these numbers up.
Note: If you think just increasing the price of your orders will solve this, it may have the most negative impact on your customer, who will seek out cheaper alternatives if they don’t like your price. There are smarter methods to go about increasing order value.
To get started, you should analyze your customer’s experience and find friction points that prevent them from purchasing.
Here are some strategies that companies use to increase CLV that may work for your business:
Set a Minimum Threshold for Free Delivery or Shipping
If you have always offered free shipping, you may have had to eat some revenue when customers purchase only 1 item costing $1.99. This isn’t beneficial to your business, and it’s contrary to what a lot of companies are doing these days.
Businesses like Amazon and Uber Eats have devised a strategy to get customers to spend more for free shipping. They have to exceed the minimum order value to get free shipping. For Amazon Prime Now customers, it’s $34.99. For Uber Eats, it varies from $20 to $30 for free delivery.
Either way, this increases the order value with each purchase and promises something that all customers like in return.
Promote a Complimentary Add-On or Free Gift
Sephora is an excellent example of a company that always has gifts. This gives the customer something to look forward to, especially when those gifts change to something that they want, such as a skincare brand that never goes on sale. Now they’ll get a free gift with a purchase for a limited time.
This inspires a customer to buy more frequently, and if gifts are included with a minimum purchase threshold, it could also increase the order value.
Show Your Products are Higher Quality
It can be difficult to charge a higher price if customers don’t know how much better your product is than competing products. What are the features, benefits, and long-term value of the product? You can use marketing, social media, and video marketing to show the quality difference in your product. Just think about the differences in marketing campaigns for Dyson vacuums and Rolex watches. They always focus on quality, craftsmanship, and customer satisfaction.
However, the actual difference is shown through user-generated content. We suggest using influencer marketing to review and demo your products for others, adding valuable information from a trusted social media influencer increases social proof and trust in your product.
Create Valuable Bundles Customers Will Love
What if you could increase order values by packaging different items that customers love but not purchase separately? While this requires some product research on your part, you could create a bundle that offers a slight discount when purchased together. This raises your order value, and it shows how much you pay attention to what your audience wants.
Increase Customer Loyalty with Perks
The competition between corporate pizza giants is fierce, but each one has a loyalty program that promises discounts and even free pizzas. Papa Johns will give you up to $20 off an order just by building up your points.
Creating loyalty programs depends on what your customers want and what you can offer. Ultimately, businesses should look at ways to reward faithful shoppers, so they keep coming back. This makes it a natural choice for a customer to return to a brand that’s going to give something back anyway.
How to Increase Order Frequency
While these programs can aid in that, they’re mostly for increasing average order value. To get more people interested in purchasing from your business, your marketing strategy will have to inventively capture their attention and direct them through a seamless customer shopping experience.
Here are some marketing strategies to try:
- Email Marketing Campaigns: You should be sending 1 to 2 emails per week with a promotion or entertaining piece about your products and brand. You don’t always have to send promotional emails to get customers thinking about your products, either. Email is simply a direct connection to your customer that you should use wisely to promote products when you know they’ll like something.
- Remarketing and Retargeting: You can target your customer list on social media networks like Facebook and Twitter. You can easily create these audiences by uploading a CSV with their emails or phone numbers. For example, Facebook will match the CSV to profiles on their network, then show your ads directly to these customers. You can tailor your ads to capture their attention and show them products they have viewed or even added to abandoned carts in the past.
- Provide Customer Service Online: When customers have a problem, you shouldn’t just recite customer policy at them for every scenario. Some situations require a supervisor or personal attention. Otherwise, you may lose that customer forever. If this happens enough times, not only will you have poor customer retention, but they may also talk about their bad experiences in Google reviews or Facebook comments.
All companies should strive for better customer experience, but many businesses don’t realize how deeply connected customer loyalty and customer service are. When you provide exemplary customer service and go beyond just an autoresponder, you affect a customer’s vision of you. That could be the reason a customer becomes a brand ambassador or simply goes to your competitor.
How Much Do Your Customers Matter?
When it comes to understanding how to increase customer lifetime value, you need the numbers first to determine the value of your customers now. If you want to get the ball rolling, you can grab a free business report that will give you some critical insights into how your business is performing online, and how you stack up against your competitors.