Your new goal: customer lifetime value
Winning new customers is time-consuming and, not least, expensive. So why not focus on the customers you already have?
Over the past 8 years, the cost of acquiring customers has risen by 222%. These costs are also called CAC (customer acquisition cost). The solution to rising CAC? Companies are prioritizing customer lifetime value (CLV). In this article, you'll find out what it is and how it can help you optimize your business too.
What is CLV?
Customer lifetime value describes the revenue a business can expect from a customer over the entire business relationship. This value can be looked at historically, by checking how much existing customers have spent so far, or predictively, by extrapolating into the future how long the business relationship will last without losing its monetary value.
Calculating CLV
To calculate CLV, you need the following values:
AOV (average order value): how much revenue does a typical sale generate?
CL (customer lifespan): how long do customers actively do business with you?
NT (number of transactions): how often do your customers buy from you on average?
That gives you the formula:
AOV x CL x NT = CLV
How do you recognize a good customer lifetime value?
The formula above gives you the customer lifetime value of your customers. Now you also need the customer acquisition cost (CAC), which describes how much it cost you to acquire new customers.
Then simply apply: CLV ÷ CAC
The ratio of CLV to CAC should be about 3:1. That means your company earns about 3x more than it costs you to win a new customer. If the ratio is above 5:1, though, it's often a sign that a fast-growing company isn't investing enough in marketing to customers.
Did you get a worse value? Or are you perhaps spending more on acquiring new customers than you earn? Then it's time for a change! A poor score can have various causes, so always check first where the actual problem lies.
For example, your customer acquisition may be too inefficient and you're spending far too much on marketing in relation. Your customer service offers further room for improvement, as you'll see in the course of this article.
Benefits of a good CLV
You invest in loyal customers who stay with your company longer, which has a positive effect on your churn rate. There's also a chance that your satisfied customers will promote your company voluntarily. Here you take advantage of a trend many already use through influencer marketing: customers trust recommendations from people they know 22% more than recommendations from strangers.
With more regular customers, you also save on CAC while generating more revenue, since loyal customers often spend more, and more often, with "their" brands.
When you focus on CLV, you get to know your customers much better, which can help you refine your ideal customer profile. Along the way, you improve your customer service and find out which customers are very profitable for you. Distinguishing between profitable and unprofitable customers can help you calculate your budget for customer acquisition, customer management and marketing.
Limits of CLV
Especially when it comes to extrapolating CLV into the future, there are always some uncertainties. Your customers' needs can always change, which also goes hand in hand with changed buying behavior.
To calculate customer lifetime value as accurately as possible, you need accurate, comprehensive data on your customers' purchase history. Even though calculating CLV will always involve some uncertainty, it's still a good indicator of which areas the company should invest in in the future. CLV predictions are often very close to reality, especially when they're backed by extensive historical data.
Improving customer lifetime value through customer service
If the customer lifetime value formula has left you with an unsatisfactory number, it's time to change something. If you're not sure where your customer service currently stands, you can test yourself here.
1. Fast answers
Answering your customers' questions quickly and effectively means they leave their interaction with your customer service satisfied. It shows that you value your customers' time. Since no company with regular working hours can always answer every question instantly, more and more companies are relying on chatbots. They're available around the clock and help your customers get their questions answered quickly. With smart human handover, more difficult inquiries are passed on to your service team. That way, no question goes unanswered and your customers feel well looked after.
2. Upselling and cross-selling
By offering your customers higher-value products or suggesting related products, you can increase your sales. This works all the better the more precisely you know your customers. A comprehensive customer profile is essential for this. With various AI tools, you can collect your customers' data effectively and then use it to recommend suitable products. A chatbot can then recommend matching products:
3. Be proactive with your support!
Show your customers that you tackle problems transparently. Let them know when you've fixed problems at checkout, for example, and encourage your customers to continue with their purchase. You can also show the latest offers on every visit to your website or invest in your email marketing.
After a purchase, ask your customers for feedback or offer them the chance to save on future purchases in your store. Your goal should always be to create the most pleasant shopping experience possible. By clearing obstacles to the best shopping experience out of the way, your customer service team makes sure customers keep coming back.
4. Feedback, feedback, feedback
Collecting feedback from your customers is important, but the decisive step is implementation! Make sure you also communicate to your customers how you're acting on their feedback. Possible negative comments from your customers then stay between your customer service and them, and bad reviews are avoided. Instead, the chance increases that positive reviews highlight how well you handle feedback.
5. Omnichannel support
Meet your customers where they are. Make sure all channels are equally integrated and kept up to date. If your customers get different answers on a store's different channels, it looks unprofessional. 87% of customers now expect high-quality support regardless of the channel they use. In addition, customers who use several channels for their purchases have a 30% higher customer lifetime value. It's no coincidence that the omnichannel approach is a customer service trend in 2024.
6. Personalize your interactions with customers
A full 91% of consumers are more likely to buy from companies that offer a personal customer experience (CX). So addressing your customers personally isn't just a sign of courtesy – above all, it's decisive for how customer lifetime value develops.
Your customers' data lets you build a customer profile. That not only makes personal engagement possible, but also remembers customers' habits and preferences so you can draw on them when the opportunity arises. With this data, you can, for example, forward customers with questions to their favorite employee, and by only suggesting products that match their profiles, you increase your conversion rates. With personalized data, you can also run effective customer lifetime value marketing.
7. Give up? No thanks!
A product is currently out of stock? Items were left in the online cart? Of course you could say: shame, but that's how it is. But you always have other options!
For sold-out products, you can suggest alternative products (maybe even with a small discount) or offer to contact your customers when the product is back in stock. You can also use AI to guide your customers through checkout and avoid abandoned carts. Alternatively, you can send a reminder that items are still waiting for your customers in their cart.
8. Loyalty must be rewarded!
Birthday greetings or a discount on the first order after signing up are measures many customers will know. But it's even better if you can offer your customers a loyalty program that really benefits them. With regular promotions, contests or discount codes, you turn a customer into a regular. This can be part of your customer lifetime value marketing strategy. Even if your competitors offer similar products more cheaply, many customers will choose you because they collect points or similar rewards with you in return. It's a give and take that benefits your company above all.
Conclusion
Having a loyal customer base behind you is probably every company's dream. In uncertain times, it can make particular sense for companies to rely on stable regular customers rather than only on expensive, uncertain new customer acquisition.
But regular customers don't fall from the sky – you have to earn them. A big lever here is customer service, as you've seen in this article. Fast, proactive support and acting on feedback show your customers that you value them.
Many points in this article can be very time-consuming, but they don't have to be. Our chatbot, for example, can guarantee fast answers to inquiries and can also act as a customer advisor by offering customers suitable products. Customer service gets relief when the chatbot takes over abandoned-cart reminders or handles personalized communication with customers using a comprehensive customer database. Read here how chatbots achieve up to 60% automation in e-commerce.
