Customer Lifetime Value (CLV) is total worth of a
customer to the business over the entire lifecycle (full duration of the
relationship) of the customer with the company. Putting it a little
differently, Customer lifetime value (CLV) is the total value (revenue) a
customer contributes to your business over his/her lifetime – which starts with
a new customer’s first purchase or and ends with the last purchase i.e. moment
of churn.
CLV is one of the key stats in marketing and helps
businesses budget/allocate funds for customer acquisition and retention
programs. For example, a customer spends Rs 20,000 per year and average life of
all the customers in your business is 5 years, the CLV here would be Rs 100,000
minus the money you spent in acquiring the customer. Say, you spent Rs 10,000
in acquiring a customer. Your CLV in this case would be Rs 90,000.
If I
put this in form of a formula, it will be:
CLV = average value of a purchase X number of times the
customer buys each year X average length of the customer loyalty (in years)
OR
Annual revenue per year x number of years the customers
stays with you – the customer acquisition cost.
If your net margin is 25% of the sales price, it would
be Rs 25,000 minus the customer acquisition cost (which is Rs 10,000 in this
case) i.e. you make Rs 15000 from each customer from the entire life-cycle of
the customer.
Customer Acquisition Cost (CAC) is a very important
parameter in sales & marketing and we should always look for a healthy
ratio of CLV:CAC. If the CLV is less the CAC must be capped but if the CLV is
high you can afford to spend more in CAC.
CLV can be historic or predictive depending on the data
used to calculate:
Historic
CLV
is sum total of the revenue from all the past purchases in a specific period.
Say one year or more. This method uses past transaction data for the calculation.
Predictive
CLV
is the total projected revenue a customer will generate for your business over
the time period he/she is going to stay as a customer. This uses past
transaction data and buying behavior of the customer.
Now
there are two ways of increasing the CLV here:
A) Increase the number of customers
for which you will have to spend money in customer acquisition. Customer
acquisition in the above case is Rs 10,000. However this can backfire in case
your Customer Acquisition Cost (CAC) is more than the Customer Lifetime Value.
B) Increase the average duration for
which the customer stays with you i.e. increase the Lifetime. The duration in
the above case is 5 years, if you can take this to 6 years your revenue from
the same customer becomes Rs 120,000. i.e. the CLV goes up from Rs 90,000 to Rs
110,000.
When you know your customer lifetime value you can
improve it. Of course, only working on retention may not be the best strategy
instead the successful businesses balance their focus on new customer
acquisition and old customer retention both. Calculating CLV will be easier if
your business model runs on membership or subscription model as compared to
customer’s need based approach. In subscription you can lock the customer with
you but in random purchase like we buy from a mall shop or an ecommerce website
it will highly vary.
In all the surveys and research it has been established
as fact that the new customer acquisition cost is always higher than retaining
an old one. Hence it’s imperative that we get to know about some tactics to
retain our customers for longer time with us. But it all starts with knowing
CLV. In fact, knowing CLV in your Business can help you in many ways, including
the below:
a) Reduce
customer acquisition cost by investing adequate budgets on right sales & marketing
activities.
b) Improve
customer retention by walking all the needed extra miles to please your
customers.
c) Encourage
existing customers to spend more on your products
d) Knowing
your most important customers who help you make more money. This can also help
you in knowing your least preferred customers and you can even decide to fire a
few. Yes, it sound bizarre but it makes complete sense when your service cost
to some customers is way higher than the amount you make from him/her through all
purchases.
Here
are 6 easy ways to increase the CLV:
1) Stay
in touch with the customer through emails, SMSes & calls. Keep them
reminding that you exist and offer a variety of services. Your goal here is to
be on top of the mind of your customer so that whenever she or her contact
sphere needs anything you sell – they must contact you.
2) Be
grateful and show it. Gratitude goes a long way. Send thank you emails just
after the customer buys something from you. Be specific and let the customer
know you appreciate the patronage. Did I tell you that people love free gifts.
Offer something physical or at least a coupon code for their next purchase.
3) Build
new products that complement the existing products. Say you sell shoes, how
about selling socks, shoe polish and polish brush as well and letting the
customers know about these. And always upsell e.g. in Domino’s, the man on the
cash counter always asks for a cold drinks and cup cake with the pizza and not
only he/she asks to if you would like to order some cold drink or cup cake but
they also tell you about the offers available on buying those extra things and
most of the time end up selling more.
4) Offer
a loyalty program to all the customers i.e. give incentives/discounts on repeat
purchases.
5) Fire
the bottom customers with whom you make the least profits, say bottom 10 to 20%
customers and try to acquire only high CLV clients. If the CLV is high you can
afford personalized attention to all the customers thus improving retention
i.e. longevity of the customer.
6) Reduce
the Customer Acquisition Cost: Remember a penny saved is a penny earned. CLV is
total revenue from the customer minus the Customer Acquisition Cost. If the CAC
reduces, CLV will increase. And yes, reducing CAC is possible provided you use
some smart marketing and sales ways.
No comments:
Post a Comment