Businesses can drive growth in two ways – by adding new customers and increasing the existing customers’ value or worth. Since acquiring new customers far exceeds the cost of retaining existing customers through value enhancement, organizations consider the customer lifetime value metric (CLV) most critical for growing their business. The metric constitutes one of the key statistics in tracking customers individually during a customer experience program. The customer lifetime value definition denotes the overall worth of any business; it becomes clear that the value is derived by considering the total worth of all interactions during the relationship between the customer and the business. As part of developing strategies for customer acquisition and retention, organizations depend heavily on the CLV metric to increase the profitability of a business.
The importance of customer lifetime value for businesses
CLV denotes the relationship customers maintain with the business organization that enriches the organization in various ways and adds value to it. Customers interact with the business to fulfill their objectives. Still, the quality of interactions is precious for the organization as it helps to develop the organizational reputation as more customers turn loyal to it. Businesses must keep a tab on the value that customers provide to the company as it helps understand customer lifetime value. For example, customers who provide referrals are precious for organizations as it strengthens the customer acquisition campaign. At the same time, it enhances the goodwill and reputation of the organization. Businesses would be keen to take special care of customers who add considerable value to the business.
How to measure CLV?
One way of calculating CLV is to use the most straightforward customer lifetime value formula, as illustrated in the following example. Suppose you buy cakes and confectioneries from a fixed shop worth $400 a year. Then, over ten years, your CLV will be $4000. But for bigger organizations with numerous products and customers and different business models. Due to the complexity, many organizations keep away from measuring CLV as the challenges of inadequate systems, segregated teams, and untargeted marketing seem too much to handle.
However, there are some valuable formulae for deducing CLV at the company, individual, or customer segment levels. To begin with, you must gather data related to average purchase value, average purchase frequency, customer value, and average customer lifespan. The ultimate formula is CLV = customer value x average customer lifespan.
Improving CLV
To improve CLV, organizations must focus on the relationship’s various dimensions and invest in customer experience by focusing on touchpoints that bolster the relationship. Providing the best user experience triggers positivity that adds value to the organization. Ensuring a seamless entry or onboarding process is another step in improving CLV.
Adding loyalty and reward programs to acknowledge the value that customers bring along with them and providing omnichannel support are other ways of improving customer lifetime value.
