Customer Lifetime Value For Beginners (4 Step Guide)
Do you know how much a customer is worth to your business? Understanding Customer Lifetime Value (CLV) will help you answer that question. Knowing what value you place on every newly acquired customer is important when it comes to allocating marketing budgets and forecasting revenue.
Boosting customer lifetime value doesn’t have to be hard. Research from Ferrand and Valette (2010) found a direct link between increased customer satisfaction and increased intention to repurchase. A happy customer is a loyal customer.
Today I’ll take you through a four step guide to help you increase customer lifetime value.
Before we do that, let’s see why CLV is important:
- Increasing customer retention rates by 5 percent increases profits by 25 percent to 95 percent. (Harvard Business School, 2000)
- Zane Cycles built a business that averages 23% annual growth on the back of high customer lifetime values of $12,500. (Chris Zane, 2011)
4 Step Guide to Increasing Customer Lifetime Value
Here’s what you’ll find in this guide:
- 1. Calculate customer lifetime value
- 2. Measure customer satisfaction to get a base point
- 3. Increase customer lifetime value by improving customer satisfaction
- 4. Track changes in satisfaction to measure improvements in CLV
Step 1. Calculate customer lifetime value
Customer lifetime value can get pretty complicated to calculate. I like to keep things pretty simple, so I’ll show you how I do it.
Calculate CLV using the basic formula below:
- Identify the number of years a customer remains active (customer lifespan).
- Calculate annual variable contribution ($ value a customer is worth each year)
- Multiply customer lifespan by $ value of customer, that equals your CLV.
Need help working out how to calculate these numbers?
Step 2. Measure customer satisfaction to get a base point
Now you have a base point and know how much a customer if worth to your business, the next step involves measuring customer satisfaction. You want to do this so you can get a better understanding of happy your customers are at the moment.
Since an increase customer satisfaction is correlated with an increase in CLV, getting a base point on customer satisfaction will help you see if the strategies and improvements you make actually have a positive impact on improve satisfaction.
Client Heartbeat is a simple customer feedback tool that surveys your customers and measures satisfaction. It’s designed specifically for measuring and tracking customer satisfaction, making it super easy to get an understanding of how happy your customers are.
Step 3. Increase customer lifetime value by improving customer satisfaction
You’ve got your CLV and customer satisfaction handled; now let’s work on ways to increase customer satisfaction so you can improve customer retention.
Remember, even the smallest improvements in customer retention can have a BIG impact on the lifetime value of your customers.
Here are some ways to improve customer satisfaction.
Understand, set and meet customer expectations
- Excellent customer service and high customer satisfaction is achieved by understanding customer expectations. You need to know who your customers are and what they want.
- Nothing kills customer satisfaction faster than under-delivering on promises and failing to meet expectations. My recommendation is you make expectations very clear early on, so that both you and your customer know what to expect.
- Deliver on your promises and go out your way to exceed expectations. Customers who have their expectations exceeded are really happy and tend to tell their friends and colleagues about the experience, turning them customer advocates.
Create an amazing customer experience
- James Allen looked at what separates the leaders in customer experience and proposed the 3D’s strategy. Design the right experience-focused propositions, deliver value to the customer, and develop capabilities to please customers again and again.
- A consistent customer experience across all channels is important to build customer loyalty. All your departments need to be communicating together; sales talking to marketing, marketing talking to customer service, and support talking to sales. This creates an environment where everyone is on the same page and knows what customer experience to deliver.
- People want to deal with real people, not brands or companies. Personalize all interactions with customers by addressing them by name, sending personal emails not marketing emails, and by empowering employees to go above and beyond for your customers, even if it means taking longer on the phone, or having to spend extra time to close a deal.
Build stronger customer relationships
- Communicate like a human-being. When speaking with your customers, try to get face-to-face, make sure you use their names, make jokes and be polite but conversational. Avoid looking like a zombie and actually empathize and emote with customers.
- Every interaction with a customer should be treated as an opportunity to monitor and build that relationship. Go out of your way to learn more about your customer and their company. Find ways to add value above and beyond what is expected.
ong relationships start with trust. Build trust by showing you are honest, credible and have the ability to keep your integrity. If you say you’re going to do something, make sure you get it done, on time.
Step 4. Track changes in satisfaction to measure improvements in CLV
Being able to track changes in customer satisfaction is important so you can see if what you are doing is having a positive or negative impact on satisfaction levels. To do this, you need a customer satisfaction tool that can send surveys and compare data from previous survey periods. This will let you compare Joe’s satisfaction scores and see them go from 7 to 9, or see Susan’s go from 8 to 5.
The ability to track changes in satisfaction will give you actionable insight into customer happiness. Focus on improving customer satisfaction to help increase customer lifetime value.
This is a screen-grab inside Client Heartbeat that shows how it tracks customer satisfaction
Boost customer lifetime value by focusing on customer satisfaction
Increasing your CLV will add serious dollars to your bottom line. This post has discussed how to increase CLV through understanding and leveraging customer satisfaction. Even the smallest increases in customer satisfaction can greatly improve CLV which will improve profits.
Successful businesses, just like Zane Cycles, rely heavily on repeat business and long term, loyal customers. By building a better customer experience and through consistently exceeding expectations, you can go a long way to WOWing your customers. This will increase satisfaction and keep customers coming back for many years to come.
For more reading on customer lifetime value, I strongly recommend these articles:
- 5 Ways to Boost Customer Lifetime Value
- 6 Guaranteed Ways to Increase Your Customer Lifetime Value with Email Remarketing
- 5 Secrets to Increasing Customer Retention — and Profits
- 3 Tips to Bolster Customer Lifetime Value
- 22 really useful customer retention stats (Slideshare)
- Calculate Lifetime Value (Infographic)