How to Increase Customer LTV With a Loyalty Program

How to Increase Customer LTV With a Loyalty Program

When brands evaluate their business success, they look at metrics like net promoter score, customer satisfaction and customer effort score. But perhaps one of the most important metrics these days is customer lifetime value (LTV), which highlights the strength of customer loyalty.

What Is Customer Lifetime Value

Customer LTV is an estimate of the net profit attributed to the overall future interactions with a customer. Understanding LTV has become critical as brands shift from a more near-time focus on quarterly profits to one that puts greater emphasis on the long-term relationships they build with their customers. This isn't a new concept, Forrester noted in a recent report, "but it’s gaining traction as customer insights professionals seek to maximize efficiency, demonstrate economic value and leverage advances in data management for strategic purposes like customer experience improvement."

Taking a Customer-Centric Approach in Customer Loyalty

Because many brands have long been concerned about meeting quarterly targets, they tend to put a premium on new customer acquisition. Studies have shown that 44% of all companies put more effort toward customer acquisition, while only about 18% direct their attention to retention.

This is a costly mistake. Consider that acquiring new customers is anywhere from 5x to 25x more expensive than selling to existing customers. And the payoff is typically not worth it since you have a less than 20% chance of selling to those new customers vs. a 70% probability that existing customers will make purchases.

Given these statistics, more brands now understand that taking a customer-centric approach is the key to success in today’s marketplace. Consumers look to their favorite brands for offers and rewards that appeal uniquely to them. And the brands that can successfully deliver personalized offers establish a stronger, more valuable bond that translates into greater loyalty and LTV.

Loyalty programs are an important component in becoming more customer-centric because:

  • 83% of consumers say they are more likely to continue doing business with certain brands as a result of loyalty programs; and
  • 76% consumers say loyalty programs are part of their relationship with brands.

This loyalty pays off. Research shows that nearly 40% of a store’s revenue is generated from only 8% of its most loyal, repeat customers. Those who return to shop a brand purchase 31% more, on average, than new customers. Over time, loyal customers are estimated to be worth 10x more than their first purchase.

A customer loyalty program can increase LTV and customer retention by engaging and interacting with customers throughout their journey and giving them more reasons to continue purchasing your brand. Studies show that just a 5% increase in customer loyalty can increase the average profit per customer from between 25% and 100%.

Personalization and Customer Lifetime Value

Loyalty programs offer a conduit through which you can collect data about individual customers – from purchasing patterns and product and service preferences to the drivers and incentives that encourage customers to change their behaviors. From this data, you can gain valuable new insights that enable you to create unique offers for each customer.

This type of 1:1 personalization is proving to be the foundation of customer loyalty and LTV growth. In fact, 80% of customers said they are more likely to purchase a product or service from a brand that provides personalized experiences.

While some brands claim they personalize offers, they really are only breaking their customer base down into microsegments based on a larger number of commonalities. This does not go far enough, though, in engaging customers on an individual level, which is required to take customer loyalty programs to the next level. Ultimately you must strive for true 1:1 personalization, combining customer, transaction and third-party data to help more deeply and completely understand the desires and motivations of each individual.

Given changing customer expectations, it’s now time to shift your focus from a product-centric approach to one that addresses the entire customer journey. True 1:1 personalization enables you to deliver offers that optimize relevance and impact, that are timely and tailored to the individual, and that yield the best customer journey and experience. By increasing engagement and loyalty, you will be well on your way to maximizing customer LTV.

To learn more, and find out how Formation can help, download our latest white paper, “How to Uplevel Your Customer Loyalty Program.”

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