For most brands, acquiring new customers is challenging and expensive. According to HubSpot, over the last five years the cost of acquiring new customers has increased by more than 50%. That’s why retaining customers and increasing the amount of profit generated from existing customers is critical.
With this in mind, we asked marketing leaders why they believe customer lifetime value matters and their advice for increasing it.
Why Customer Lifetime Value Matters
Clearly defining customer lifetime value, or CLV, is key to getting it right. According to Susanne Gurman, senior vice president of marketing at New York, N.Y.-based SecurityScorecard, CLV is the total worth to a business of a customer over the whole period of their relationship. “[Total worth] includes a direct purchase,” she said, “but could also include other factors that help the company generate revenue such as referrals.”
David Richter, director of marketing at Markow, U.K.-based CIPHR said CLV should be the average net profit generated by a customer over the duration of their relationship with the business. “Basing the CLV on the net profit and not just the revenue is important because when viewed through this lens, it can guide a company’s strategy for which market segments to target, how much to spend on what channels to acquire these customers and how best to serve new customers,” he said.
A clear definition of CLV allows businesses to determine how much they should invest in existing customers to drive future revenue. When there are longer relationships with existing customers, typically beyond two years, it becomes important for businesses to actively increase their CLV.
Related Article: Calculating Customer Lifetime Value Is Tricky
Tips For Increasing CLV
There are multiple ways to measure and in turn increase the business’s average CLV. Here are some tips that can help:
An effective onboarding process — especially for complex products or services — is crucial. “It doesn’t matter how effective your product is at solving a painful problem,” Richter said, “if a customer doesn’t know how to use it effectively and doesn’t get into the habit of using it then they’re likely to churn.” Helping customers get the most out of a product or service will make the perceived switching cost higher and encourage loyalty in the long run.
Great customer experience comes down to listening during every interaction. That way, brands can better understand customers’ likes, dislikes and preferred methods of communication. “Understanding this allows you to act in a way that will be personal and relevant to them and increases their propensity to more fully engage with you over longer periods of time,” said Sara Spivey, chief marketing officer at New York, N.Y.-based Braze.
Don't ignore your dissatisfied customers. “Unsatisfied customers are equally important if not more to pay attention to as they will tell you about potential areas within the business that are not optimized or offer insight into extended use cases not originally intended but should be considered,” Gurman said. Because they’re a paying customer, they likely saw some value in the brand and there’s still an opportunity to salvage the relationship at a lower cost than acquiring a new customer.
Another way to positively impact CLV is by building a community of like-minded individuals. “Leaving a brand becomes a lot harder if you have to also leave a community of people that you have an affinity with,” Spivey said. Appealing to a customer’s sense of community is one of the best ways to encourage customer loyalty. “If you build loyalty based on a deep understanding of who they are that loyalty will be rewarded again and again,” she said.
Related Article: Keys to Building Customer Lifetime Value
Common CLV Mistakes
Richter said many companies fail to manage customers properly during changes within their workforce. “Whenever there is a new decision-maker in a function there is an outsized risk of that customer moving to alternative suppliers,” he said. That’s why it’s crucial that companies have a clear plan for transitioning business leaders, sales and customer service representatives or any other employee that’s customer-facing.
Brands also need to be careful about drawing conclusions from just a few data points. “Get to know your potential customers over time,” Spivey said. “Build a full picture of who they are and how you can add value to their experiences.” Failing to get personalization right damages credibility and tells buyers the brand isn't listening, she said.
In the end, Gurman said, “It costs less to keep an existing customer than it is to acquire a new one so increasing the value of your existing customers is a great way to drive growth while keeping new customer acquisition costs (CAC) down.” Brands need to find the right balance between CLV and CAC that makes sense for their business.