Do you want to know which customer brings the most revenue for your business without directly asking them? Are you tired of spending money on targeted marketing campaigns that perform only in the short term? Then it would be best to learn why customer lifetime value is essential for your business and how to use it to your advantage.
Customer Lifetime Value (CLV) is a metric that represents the expected total revenue a single customer generates for your business.
But why is this such a popular metric? This article will discuss why customer lifetime value is important, what it says about your business and the ideal number.
What Is a Good Customer Lifetime Value?
The basic formula for calculating customer lifetime value is CLV = (Customer Value x Average customer lifespan) – Acquisition cost. This means that the basic steps you need to follow are:
- Calculate the total money the customer has spent on your business.
- Multiply that number by the number of years you expect that customer to do business with you. You can estimate this using industry benchmarks and insights from email loyalty programs, customer data collection, offline attribution ROI, etc.
- Then subtract the money you spent on acquiring that customer from the product of the above steps.
After understanding why customer lifetime value is important, you probably will ask yourself, “what is a good customer lifetime value?”
The ideal value differs for each industry and depends on the acquisition costs. You will require a higher CLV to be profitable if you have higher costs.
The CLV should be greater than your cost of acquiring a new customer. The range should typically fall between 3 to 5 times greater. If you spent $50 on acquiring a customer, their CLV should be $200.
Why Is Customer Lifetime Value Important? 6 Main Reasons
There are several types of CLVs, and a combination of these helps you achieve many benefits. These include
- Historical CLV considers the user’s past purchases to estimate their future with the company.
- Predictive CLV analyzes users’ past behaviors to predict if they will bring significant revenue.
- Cohort CLV is estimated by segmenting customers into groups with similar behaviors. The people in the same group will have similar CLVs.
- Incremental CLV is the continued value that a customer will bring in the long run.
- Social CLV is the value of a customer’s social network and ability to refer customers to the business.
Customer lifetime value helps you understand the importance of each customer for the total revenue. With this data, you can make better decisions about the investment you need to acquire and retain them.
But that is only part of what this metric can help you achieve. Read on to discover the top 6 reasons why customer lifetime value important so you can leverage it to grow your business.
Why Customer Lifetime Value Is Important: Measures Customer Loyalty
The first reason for “why is customer lifetime value important” is measuring customer loyalty. By knowing how much a customer spends on your business over time, you can quickly tell the level of customer loyalty.
With this information, you can convert him into a loyal customer by following the right strategy. It also helps you monitor the changes in customer loyalty. A decline in CLV may mean that your business is losing loyal customers. This may help you pinpoint the problem and work towards improving it.
Implementing strategies such as discounts, events, promotional emails, etc., will help improve your customer loyalty rate. Additionally, understanding your customer’s behavior and buying patterns __will help you improve customer loyalty by sending them personalized messages.
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Why Customer Lifetime Value Is Important: Tailors Business Offerings
Tailoring business offers to encourage growth is another reason why customer lifetime value is important. CLV helps you identify your premium customers who generate the most revenue. You can then target these customers with personalized offerings.
Studies have shown that repeat customers bring in almost 65% of a company’s revenue. Your revenue will increase if you tailor your products and services to your customers’ needs.
By identifying your valuable customers, you can offer them personalized incentives. For example, suppose you run a restaurant. The CLV for one of your customers shows that he frequently orders steaks. If you offer him 20% off his favorite steaks, he will become even more loyal to your restaurant.
Similarly, suppose you are a beauty brand and notice one of your customers with a higher CLV regularly utilizing your holiday discounts. This shows that these discounts are effective and hints at why customers are loyal to your business. If you improve your loyalty program with this information, you can encourage them to visit your store more frequently.
Why Customer Lifetime Value Is Important: Evaluates Marketing Success
You’ve been spending money on countless marketing strategies but aren’t seeing the results you expected. This is the third reason why customer lifetime value is important. It helps you evaluate your marketing success.
Comparing your CLV to the customer retention rates can give you valuable insights into your marketing. Suppose 5 of your customers did repeat business with you over a year. The CLV for those customers will be higher. This may indicate that your marketing strategies are a success.
You can also identify the campaigns that brought in your most valued customers. Trace the customers with a higher CLV back to the campaign that prompted them to buy from you. Then optimize your strategy to include the most effective campaigns.
Why Customer Lifetime Value Is Important: Improves Business Operations
If you’ve been wondering, “why is customer lifetime value important to improve my business operations,” here is the most important reason. But first, what makes a business grow? Its ability to identify the loopholes and eliminate them for the business’s betterment.
As stated above, CLV can help assess the success of your marketing campaigns and make informed decisions. In return, this enables you to improve your business’s operations and overall growth.
Once you know which customers have a higher CLV, your sales team can focus on those customers. Providing exceptional services and incentives can encourage these customers to continue their loyalty.
CLV can also help you identify your products and services that are performing the best. With this data, you can prioritize your efforts on them and generate more sales. You can develop new products or services that fit your most valuable users’ needs.
Why Customer Lifetime Value Is Important: Prioritizes Customer Acquisition
Prioritizing customer acquisition is yet another reason why customer lifetime value is important. Once you recognize your valuable customers, you can assess their behaviors and patterns. This will help you create strategies to acquire more VIP customers.
You need to keep track of your acquisition strategies to assess the most successful ones. Keeping only those can help you avoid spending money on strategies that are not working. Prioritizing the successful campaigns is possible by calculating the CLV and tracing it back to its origin.
Customer acquisition is costly, so you need to spend only on channels likely to bring in customers with a higher CLV. But how can you predict that? By assessing the CLV of your existing customers, studying patterns, and using insightful data to make assumptions.
You can keep customers satisfied and loyal by focusing on the ones with a higher CLV. These customers will likely generate more revenue over time and help improve your business’s essential loyalty metrics.
Why Customer Lifetime Value Is Important: Segments Customers
Segmenting customers concludes this list of reasons why customer lifetime value is important. You can create a separate category for them by identifying the most valuable customers. This way, you will know which customers require unique treatment to continue the fruitful business.
It is no secret that when you present customers with personalized offerings, they are more likely to stay loyal. Segmenting customers can help you efficiently do this and create marketing strategies that fit these segments.
Identifying customers with a higher CLV also helps you efficiently allocate your resources. You can spend more money and assign appropriate sales teams for the marketing and satisfaction of these customers.
CLV data can also help you identify opportunities to acquire new similar customers by understanding common characteristics and behaviors. You can set up automated emails based on their behaviors and history by segmenting your customers.
Why Is Customer Lifetime Value Important for E-commerce Brands?
The previous section discussed why customer lifetime value is important for businesses. But what about e-commerce brands? Is there a difference between the importance of these brands from other companies? E-Commerce is becoming the most popular business these days.
Here are some reasons why customer lifetime value is important for e-commerce brands.
- Focus on the proper channels: Suppose you ran an ad for your product on social media. The customers who visited your business through ads had a higher CLV than those engaged via email.
This means social media ads are a more profitable channel for your e-commerce brand. Knowing this, you can focus on promoting your product on the proper channels, which can help you gain more loyal customers.
- Assess scalability: By monitoring the CLV, you can run sales reports and accurately analyze your business. This helps you learn whether your business is scalable or not. If you scale your business without knowing this, you might lose revenue or, worse, have to shut it down.
If these reports reveal that you cannot scale your business, you can create marketing strategies to retain customers with a higher CLV. This will help your business grow over time.
- Increase revenue: Some might argue that customer acquisition is the most important thing a business should spend money on. But the truth is, maximizing the CLV brings in more fruitful results. If most of your customers have a higher CLV, you retain them.
These customers are loyal to your brand and will generate more revenue for you than people with a lower CLV. Additionally, your acquisition costs will decrease, which will help you spend your revenue on improving your products.
What Does Your Customer Lifetime Value Say About Your Business?
If you are a business owner who wants to know why customer lifetime value is important, you need to learn what your customer lifetime value says about your business.
Customer lifetime value has a close relationship with your business’s performance. If your CLV increases over time, you are using the right marketing strategies to acquire the most valuable customers. It also means that your business can retain most of its customers.
A good CLV indicates that customers like your products and services. It also suggests that you are doing an excellent job with customer service, which is why you can gain more loyal customers. When your business has a good CLV, you can quickly identify the strategies responsible for it.
Once you build up on these strategies, your business will likely see even more success. Customer lifetime value is a crucial metric in assessing the quality and effectiveness of your products and services. A higher CLV means that your products are performing well. This will also help you reduce maintenance and upgrade costs.
Additionally, gaining new customers is more costly than retaining previous ones. If your CLV is high, you won’t have to spend vast amounts on customer acquisition. This says a lot about your business. It means you are going in the right direction with your business operations and strategies.
Conclusion
Your customers’ lifetime value should be greater than the acquisition costs. Assessing business operations, marketing strategies, and increasing growth is why customer lifetime value is important. A higher CLV means that you likely retain more customers than you acquire.
To calculate the CLV for a customer, you will need to factor in the average purchase value, purchase frequency, and customer acquisition. The CLV and other metrics, such as ROI and marketing churn rate, help you assess your business’s overall health. This way, you can focus on improving it.
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