In this article you will learn:
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 the customer lifetime value (LTV), which highlights the strength of customer loyalty.
In this article you will learn:
- What Is Customer Lifetime Value
- How to Calculate Customer LTV
- 7 Modern Ways to Increase Customer Lifetime Value
- Personalization and Customer Lifetime Value
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."
Source: Business Wire
How to Calculate Customer LTV
LTV takes every repeated purchase into account to calculate the value of the product acquisition. A once-purchaser will have a less expensive return than a customer purchasing through your site multiple times. Understanding your LTV is a critical step towards retaining existing clients, and determining your brand's customer acquisition cost.
To calculate customer lifetime it’s good to know which model would offer the most beneficial data. But if you are interested in digging a bit further consider these two models companies commonly default to determine their customer's value.
Predictive Customer Lifetime Value: This model is best to help you determine your most valuable customers, products, and services that contribute the most value to your business. In addition, this model could help brands improve their customer retention. Here is a simple formula you can use to calculate overall customer lifetime value.
Historical Customer Lifetime Value: This model isn't intended to determine if consumers will continue with your brand but rather to identify the customers who frequently interact with your brand during specific times such as the holidays or sale periods. Although these customers will often become inactive, be cautious as this model could recognize these customers as valuable.
Steps to Calculate Customer Lifetime Value
1. Determine your Average Purchase Value: The average purchase value is crucial to help marketers understand the average dollar amount spent each time a customer places an order. This formula will reveal the purchase habits of your customers and predict future sales and revenue. To do so, divide the total revenue by the number of purchases made within a specific period
2. Calculate the Average Purchase Frequency Rate: Finding the average purchase frequency rate metric will help you understand how often customers buy from your business. To calculate the APFR, divide the number of unique customers by the number of purchases made over a specific time frame.
3. Estimate Your Customer Value. Understanding customer value is crucial for any business, especially when deciding where a portion of the budget should go. This number will give better insight into what should be spent toward customer acquisition cost or towards offering more value to existing clients or customers.
4. Calculate the Average Customer Lifetime Span: This metric will allow you to see how average time a person remains an active customer before they become inactive.
5. Calculate your Customer's Lifetime Value: Your customer lifetime value will help you determine the average value of a consumer of the whole relationship. The higher the number, the more likely revenue from new customers and existing will offset or be higher than the costs.
Why Taking a Customer-Centric Approach in Customer Loyalty Is Important
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% of 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%.
7 Modern Ways to Increase Customer LTV
Consumers are in the midst of a transition in various aspects of their lives. To ensure that we increase customer satisfaction and LTV.
Send personalized offers: Every customer has different needs that drive purchase decisions. By offering consumers individualized experiences, your brand increases the chances of increasing their lifetime value. If your brand offers a loyalty program, leverage the data you have to optimize dynamic offers.
Increase customer engagement: Use your customer engagement platforms to optimize customer engagement to increase your customer retention.
Understand your customers' journey: Every customer has a different journey; learn from the data and create value for each customer.
Reward your most loyal customers: An existing customer rewarded for their loyalty has a higher chance of returning and becoming frequent buyers.
Create a seamless customer experience: Customers want to know that their data is secure and helpful to meet their needs when inquiring for help.
Improve any areas of poor customer service: Customers want to know that their concerns are being addressed.
Listen to Your Customers: Collect actionable feedback
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 micro segments 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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