3 Pillars of Customer Lifetime Value That Lead to Bigger Profits
Are you putting in enough effort to ensure that your customers become long-term brand advocates? Do you have any idea how long it takes a customer to reach the recommended sale amount after they buy from you? If not, then customer lifetime value is something you need to look into.
Customer lifetime value, or CLV, is the value of a single customer over their lifetime. It describes the complete scope of a company’s profits earned by a relationship with a single customer. It allows businesses to run experiments, try out new ideas and create synergies across multiple products and markets.
There are three pillars to customer lifetime value: churn rate, customer loyalty, and scalable sales and marketing. Here is a look at each:
Churn rate is the percentage of your customers who abandon you before they’ve made their money back. It’s a serious business problem that can be solved by making sure you have a good product and an excellent customer service team.
It measures how many customers will leave your company over the course of one year. Churn rate = lost customers / total customers × 100%. So if you’ve got 100 customers and 20 of them leave within a year, then your churn rate is 20%.
To calculate your churn rate, take this formula: [lost customers / total customers] × 100%. Then multiply it by 12 to get an annualized figure. For example: [20/100] * 12 = 2%.
How likely your customers are to recommend your products or services to others. You can measure this by asking customers questions like “How likely are you to recommend our product/service?” on surveys or through Net Promoter Score (NPS), which is calculated based on responses to that question.
Also, to get a better idea of how much value each customer provides over time, look at their lifetime value (LTV). This number takes into account both their initial purchase price and how many products they purchase over time.
What can you do about this? You can increase customer loyalty—so that fewer people are leaving each month. Or you can increase your sales and marketing efforts so that new customers replace those who leave.
Scalable sales and marketing
You’ve got to be able to scale up sales and marketing efforts if there’s demand for what you offer; otherwise, profits will go down when demand goes up—and that means no profits at all.
This is about tracking sales channels, marketing methods, and other areas of your business that will allow you to scale up and grow over time without having to hire new employees or reprioritize resources away from other projects to meet demand.
As a business owner, getting people to come to your store or read your content is only part of the big picture. Many businesses focus on making new sales but do not factor customer lifetime value into their marketing strategies. If you take customer lifetime value into account, however, it will begin to make sense for you to spend money on customer retention as well as securing new clients.
Translate this knowledge into tangible marketing campaigns that deliver consistent profits. Then share those findings with fellow competitors who are also struggling to keep up with the times.