The Importance of Customer Lifetime Value and How to Calculate It Discussion Answer Questions in 1 page: 1. How often would you recommend calculating CLV

The Importance of Customer Lifetime Value and How to Calculate It Discussion Answer Questions in 1 page:

1. How often would you recommend calculating CLV scores? Monthly, yearly, etc.? Please explain your decision; it could vary by type of industry such as package goods or hospitality.

2. In addition to the variables listed in the article in the “Formula” section, suggest three additional variables for each of the following industries you might consider for CLV calculations:

a. Retail

b. Automotive

c. Restaurant chain

Please explain your choices.

3. The article lists “9 Ways to Increase Your Customer Lifetime Value”. Which of the recommendations would CLV have the biggest impact on? Please explain your selection. ____________________________________________________________________________________
The Importance of Customer Lifetime
Value (CLV) and How to Calculate It
January 15, 2019
The customer lifetime value (CLV) metric might not sound very important, but
failing to calculate it can put you behind your competitors.
CLV tells you how well you’re resonating with your audience, how much your
customers like your products or services, and what you’re doing right — as well as
how you can improve.
What business owner or marketer doesn’t want to know that information?
Math isn’t everyone’s strong suit, but learning how to calculate lifetime value
doesn’t require high-level arithmetic.
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Furthermore, you can continue to calculate this metric over and over again to
establish map points as your business grows. When your customer lifetime value
increases, you know you’re making a better impression on your existing
customers. You can then reverse-engineer the experience for future customers.
But first, what is customer lifetime value? And how can you increase it for your
business?
What is Customer Lifetime Value (CLV)?
Customer lifetime value (or life-time value (LTV), is the average amount of money
your customers will spend on your business over the entire life of your
relationship.
For instance, if a customer continues to buy products or services from your
business for 10 years and spends $10 per year, his or her customer lifetime value
is $100, minus any money you spent to acquire that customer.
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Imagine that you sell socks from an e-commerce store.
You spend $5 in advertising to attract a customer. He or she buys an average of
seven pairs of socks every year for 10 years. Your profit margin on each pair of
socks is $10.
Based on this data, you profit $70 per year from the customer, which works out to
$700 over the decade. You then subtract the amount of money you spent to
acquire the customer, which results in a net customer lifetime value of $695.
That’s a simplistic example, of course, but it demonstrates important data.
The Importance of Customer Lifetime Value
Your customers aren’t just worth the amount of money they spend on your
business today. They have future value if you’re able to retain them as customers.
In the example above, we took advertising into account. It cost us $5 to attract
one customer who wound up spending more than $700 in our fictional ecommerce store.
But what if we sold those 70 pairs of socks to 70 different customers?
We’d have to spend $5 per customer to acquire them, which would reduce our
profits considerably. Plus, our brand loyalty would take a huge hit.
Customer lifetime value is important because, the higher the number, the greater
the profits. You’ll always have to spend money to acquire new customers and to
retain existing ones, but the former costs five times as much.
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When you know your customer lifetime value, you can improve it. Work on
retaining your existing customers through email marketing, SMS marketing, social
media marketing, and more. You still want new customers, but don’t forget about
the old ones.
How to Calculate Customer Lifetime Value
Several different methods exist to calculate CLV. The customer lifetime value can
be either historic or predictive.
In other words, you might want to calculate CLV based on actual purchases over
the years or based on what you predict customers will spend.
Regardless, you need to know the average profit margin for purchases, the
amount you spend to acquire a customer — customer acquisition cost — and the
length of your relationship with customers.
The way you calculate customer lifetime value can also vary based on your
business model. For instance, it’s easier to calculate CLV if you have a subscription
model than if you’re in e-commerce. That’s because sales become more
predictive.
Companies like BarkBox and ButcherBox charge the same amount every month
for their deliveries, and their customers pay monthly or annually. It’s harder to
predict how often a customer will return to buy new socks from your online retail
storefront.
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Customer Lifetime Value Formula
The simplest customer lifetime value formula is the historic model. The CLV is
equal to the total value of each transaction multiplied by your average gross
margin.
Let’s say a customer visits your website 10 times and spends $10 each time.
Your average gross margin is $5 after taking into account how much you spend to
get the average customer to spend money, which means you’ll multiply $100 (the
total amount spent) by $5 (your average gross margin) to get $500.
If you want to take the predictive approach, you’ll need to get a little more
complex.
This average customer lifetime value formula requires several data points:
•
Average monthly transactions
•
Average amount spent per transaction
•
Average number of months your customers remain loyal
•
Average gross margin
Multiplying these numbers together will give you the predictive CLV.
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9 Ways to Increase Your Customer Lifetime Value
Now that you know how to calculate CLV, how do you improve it? Follow these
nine tips to boost your customer lifetime value and retain more of your
customers.
1. Segment Your Email and SMS Lists
Whether you’re marketing to your customers via email or SMS — or both — make
sure they get segmented based on where they are in the sales funneland what
their interests are. Someone who’s interested in your activewear line won’t want
the same content as someone who wants to buy your dress socks.
Similarly, if a customer has only recently been introduced to your brand through
an educational blog post, he or she probably isn’t ready to buy. He or she doesn’t
need the same content or messaging as someone who has demonstrated intent
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to purchase. You also need a segment for repeat customers. You’ll want to keep
in touch with those people and bring them back to your site for future purchases.
Too many marketers focus on bringing in new customers and forget about those
who have already spent money on their businesses. Once you’ve segmented, you
can use drip campaigns to nurture both prospective and existing customers. Don’t
bombard them with salesy messages. Instead, build relationships with them.
2. Build Products or Service That Complement Existing Offerings
The number of products or services you sell will depend on several factors,
including whether or not the customer is likely to quickly buy more of what you
have. For instance, someone who sells socks will sell more products than
someone who sells washing machines. People need new socks more often than
they need new washers. However, you can build products or services that
complement your existing lineup to encourage more purchases.
For instance, maybe you sell washing machines as well as your own brand of
detergent. Customers who buy your machine might also want the detergent
made specifically for it, and might therefore become recurring customers.
Alternatively, maybe you sell one great product that people buy over and over
again. Instead of creating something else to sell, focus on recommending your
product as a potential gift idea.
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3. Take Advantage of the Freemium Model
One of the best examples of the freemium model increasing customer lifetime
value is in-app purchases. You can play Candy Crush without spending a dime, but
if you want to purchase extra lives or other boosts to the game, you need to pull
out your wallet.
This model increases customer lifetime value because customers get to try out
your product, become enamored of it, and decide to spend money. In just one
year, Candy Crush managed to rake in nearly $1 billion. That’s pretty impressive
for a company that makes games people can play for free.
If your business doesn’t lend itself to the freemium model, you could offer
different levels of flexibility and features. For instance, you might manufacture
three different blenders that increase in efficiency and price point. That way, your
customers not only have more choices, but they can upgrade to the better model,
thus spending more money.
4. Consistently Send Out Coupon Codes and Other Special Offers
Coupon codes are vastly underrated. People love getting a deal, and even if your
10-percent-off coupon still leaves you a healthy profit margin, consumers will take
advantage of it. The question is when to send out your coupon codes or other
special offers.
If you’re interested in increasing customer lifetime value, consider sending a
coupon code a couple weeks after a customer makes a purchase. The transaction
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is still fresh in the customer’s mind, so he or she will be more willing to return to
your site and check out other products or services. Try offering a discount on the
purchase of two or more items. You’re encouraging the customer to spend more
money, but it still feels like a deal. Product and service packages work well for a
reason. If you can save money by bundling your Internet, television, and phone
service, why wouldn’t you?
5. Make Use of Thank-You Emails
Gratitude goes a long way in business. It’s also a great way to keep in touch with
your customers. A thank-you email is a message you send customers right after
they purchase something from you. It doesn’t ask for anything — it just lets the
customer know you appreciate their patronage. And, as a free gift, you might
include a coupon code to boot.
The point is to make contact with the customer right away. Keep your brand topof-mind to encourage repeat visits to your website — and, with any luck, repeat
purchases. Thank-you emails can also be the starting point for a new drip
campaign. A few days after the thank-you email, you might send a quick survey to
ask about the customer’s opinion of the transaction. This constant contact can
increase customer lifetime value exponentially.
6. Funnel Traffic From Social
If someone buys from you, they might also follow you on social at the same time.
Don’t squander that opportunity. Keep in touch with your regular customers via
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social and target them with offers to come back to your site, such as to a landing
page. Send out lots of gratitude when people buy your products and services so
they know how much you appreciate them.
At one time, your online presence might have existed solely on your website.
That’s not true any longer. You’ll want to take advantage of all contact with
current and prospective customers to keep the traffic flowing from one online
presence to another. You’ll increase brand awareness, which can have a direct
impact on customer lifetime value.
7. Create a Seamless Buying Experience
People often fail to purchase products from a company more than once because
of problems with the buying experience. Customers get irritated if they’re timed
out during the purchase process or if you ask for too much information.
Conversely, customers who enjoy a seamless buying experience often share that
fact with their friends. They let others know that you not only sell a great product
or service, but that it’s easy to buy from you. Consider offering more payment
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options, reducing form fields, and estimating shipping costs from the beginning.
Don’t put any roadblocks in the way that might discourage first-time buyers or
cause existing customers to boycott your business for good.
8. Use Checking-In Emails
Another great way to boost customer lifetime value is to get in touch with
dormant customers. These are people who have bought from you in the past, but
have been inactive for a long period of time, such as six months.
Send an email that casually asks how they are and whether they’re interested in
returning to your site. You can also give them the option to opt out of your emails
if they’re no longer interested. This might seem like a bad thing, but scrubbing
your email list of dormant or inactive subscribers can have a positive impact on
your business.
If people aren’t interested in hearing from you, don’t give them a reason to send
your emails to spam. Those who do still want to hear from you might remember
how much they liked your products and services and return. That will increase
your customer lifetime value.
9. Offer a Loyalty Program
Want your customer lifetime value to shoot through the roof? Start a loyalty
program. Customers can earn points toward future purchases and save money at
a later date. There’s a reason so many brick-and-mortar stores, from Walgreens
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to Best Buy, have loyalty programs. They work. Even if you’re online-only, give
your customers the chance to save money on a future purchase by continuing to
buy from you.
Conclusion
Customer lifetime value matters more than you think. It impacts customer
retention rates, reveals the level of brand loyalty you command, and helps your
business stay in the black.
If you’re not actively trying to improve CLV, now’s the time to start.
Focus on retaining customers as much as you work to acquire them in the first
place. Use Crazy Egg’s heatmap tools to figure out where people are clicking, how
far they scroll down your sales pages, and more so you can optimize your site for
the optimal shopping experience.
The more effort you put into customer lifetime value, the more revenue your
business will generate.
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Questions
1. How often would you recommend calculating CLV scores? Monthly, yearly,
etc.? Please explain your decision; it could vary by type of industry such as
package goods or hospitality.
2. In addition to the variables listed in the article in the “Formula” section,
suggest three additional variables for each of the following industries you
might consider for CLV calculations:
a. Retail
b. Automotive
c. Restaurant chain
Please explain your choices.
3. The article lists “9 Ways to Increase Your Customer Lifetime Value”. Which
of the recommendations would CLV have the biggest impact on? Please
explain your selection.

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