Companies use many different metrics to quantify their success. Some of the more common ones include: reports to track and measure operations data, website traffic, and employee performance. Beyond these, customer lifetime value (CLV) has been identified as one of the most helpful business metrics.
CLV carries special significance in the context of business growth. As a measure of performance, it represents the cumulative value that repeat customers bring to a company. This is particularly important since it’s more cost-effective to add value to existing customers than to find new ones.
Companies seeking to accelerate growth and optimize revenues should pay close attention to CLV metrics. Doing so enables business owners to:
The points below examine each of these concepts in further detail and offer advice on strategies organizations can use to enhance their customer lifetime value propositions.
Customer lifetime value calculations enable businesses to segment customers into categories that describe the level of lifetime value they offer. For instance, separating customers into high-paying, average-paying, and low-paying groups. However, there are many other ways to approach this concept. Another widely used model applies the following four categories to a company’s customer base:
Businesses can learn a great deal about their customers’ profiles through detailed customer lifetime value calculations. This, in turn, helps decision-makers to develop evidence-based strategic resolutions regarding budgeting priorities and spending allocations. More specifically, it can function as an effective guide for assigning resources toward acquiring, serving, and retaining customers.
Successful entrepreneurs and business management experts consistently identify careful and accurate budgeting as one of the essential keys to small business success. In respect of quantifying and extracting insights from CLV calculations, budgeting offers multiple distinct advantages, extending to:
Along with customer acquisition cost and customer profitability, customer lifetime value represents one of the three vital calculations business owners and managers should make when setting a marketing budget.
Monitoring customer lifetime value forces business owners to pay closer attention to other crucial performance indicators and measures of business success. Prime examples include margins, customer retention, and customer loyalty – all of which factor into CLV calculations.
Businesses can use a simple CLV formula to obtain a high-level overview of lifetime value performance, or a detailed formula that yields more comprehensive metrics.
The simple formula runs as follows:
A more comprehensive version draws on similar principles but considers factors with greater precision. Three pieces of data are required for the detailed CLV formula:
Then, using those data points, the calculation can be completed as follows:
In addition to greater precision, the detailed method offers several other advantages. For instance, it accounts for both inflation and positive or negative changes in overall revenue. The simple CLV formula does not.
Taking measured, strategic steps to improve customer lifetime value supports both the short- and long-term financial health of the business. This is particularly relevant to highly competitive industries where the customer experience often plays an outsized role in generating loyalty.
Three popular strategies for enhancing customer lifetime value include paying attention to customer satisfaction, fostering open communication between the customer and the business, and creating appealing rewards programs.
Satisfied customers represent one of the most reliable sources of recurring business revenue. Experts widely recommend investing time and resources in generating an enjoyable, customized, and positive customer experience, as positive experiences are a foundational driver of satisfaction.
Strategists can begin by measuring existing levels of customer satisfaction. These insights highlight the company’s strengths and weaknesses, as well as areas for improvement. Surveys have historically served as a means of extracting such insights, but they have significant limitations. For instance, low response rates can skew results and negatively influence their reliability and accuracy.
As alternatives or supplements to surveys, consider the following approaches:
Maintaining open and accessible lines of communication is another vital aspect of creating a positive customer experience. Communicating with customers is one of the most direct and effective ways to uncover insights into the successes as well as the shortcomings of operational policies and strategies.
Depending on the nature of the business, communication strategies can be proactive (the business contacts the customer) or reactive (the customer contacts the business).
Examples of proactive approaches include:
Reactive approaches are most effective when the company representative engaging the customer practices the principles of active listening. That is, let the customer speak, absorb what they are saying, and do not interject with comments, objections, or questions.
Loyalty programs and exclusive rewards tap into a powerful aspect of customer psychology. And when leveraged effectively, they can make the customer feel individually valued. That feeling of being “special” to the business has the potential to unlock greater levels of long-term value as the customer returns again and again.
Some common and innovative examples of rewards and loyalty programs that drive improvements in customer lifetime value include:
These represent only a few of the many different strategies organizations can leverage to enhance customer lifetime value through rewards and loyalty programs. As a guiding principle, businesses should strive to personalize their programs and build a degree of agility that allows the company to respond to unexpected shifts in customer sentiment and external influences affecting the industry, market, or wider economy.
Enhancing and optimizing customer lifetime value delivers powerful benefits for companies in any industry where there are direct interactions between the business and its customers. Sales teams frequently function as the frontline drivers of business growth and customer relations, and improving their performance often yields similar benefits for CLV and other KPIs.
The Skynamo sales management platform offers powerful tools to businesses and sales team managers seeking deeper insights and greater levels of control. Drop Skynamo a line to learn more about its powerful digital products and the positive impacts they can make.