E-commerce sites compete in the marketing and sales fields. Each company applies various methods to attract customers and increase sales amounts. However, companies realize that there is no sufficient increase in profit margin even if the customer numbers increase and the business grows. That shows a necessity in calculating customer lifetime value. So, what is customer lifetime value, and how is it estimated?
What Is Customer Lifetime Value?
Customer lifetime value is the financial value a customer adds to the company during the customer-brand journey. The abbreviation for customer lifetime value is CLTV. It has the effect of making a difference between companies while creating a marketing strategy. CLTV gets its strength from metrics such as customer rates, loyalty, and customer conversion percentages, which increase the company’s future values.
Why Is It Important?
Some companies approach their customers for short-term plans, and as a result, sales still occur, yet the continuity is unaccounted for. However, companies who aim for long-term investing for their customers optimize their work according to customer lifetime value. This way, the company can sustain continuity and profit. According to the research, the cost of gaining a new customer is 5 to 10 times more than keeping the relationship with an existing customer. Therefore, it shows that every company should consider customer lifetime value when setting a budget for the work.
How Is Customer Lifetime Value Calculated?
CLTV measures the income from customers during their lifetime with the company. The calculation differs depending on each company. Research shows that only 42% of companies correctly apply CLTV calculations. The CLTV formula is:
- Customer Lifetime Value = (Customer Value x Average Customer Lifespan)
- Customer Value = (Average Purchase Value x Average Number of Purchases)
Ways to Increase Customer Lifetime Value
CLTV is an essential factor in increasing their incomes. We can list the ways to improve CLTV that is an indicator to make your company sustainable:
1) Measure and Reward Customer Loyalty
The most effective way to improve customer lifetime value is to manage customer retention. The research shows that a 5% increase in customer retention can lead to a 25% increase in profit margin. You can measure customer loyalty and commitment toward your company through CLTV. 2016 Customer Loyalty Statistics suggest that 47% of customers might become a competitor’s customer in only one day. However, you should primarily focus on enhancing your customer services to increase your CLTV. This way, you can maintain your customer loyalty and retention rate.
2) Offer Personalized Experiences
Regardless of the complexity of the marketing process for e-commerce companies, technology paves the way for easy management of that. Through CLTV, you can find out which customer segments are more valuable and long-term for your company to invest. You should provide personalized experiences after identifying your customer audience to retain them at your company. For instance, you can address them with their names at the beginning of emails instead of sending standard messages. You should keep in mind that customers who feel special and privileged will connect to your brand, so you’ll increase their chances of purchasing your products.
3) Enhance Customer Experience
CLTV allows you to analyze many concepts such as customer returns, loyalty, and satisfaction. Therefore, the effectiveness of the efforts made in customer service becomes visible. Companies evaluate their investments, and it becomes clear whether the steps they take are right or wrong. This way, companies can create a strategic plan by analyzing which customers they should invest in and where the income will be higher.
While developing a strategic plan, you should focus on customer service to increase customer lifetime value. Therefore, the first thing to do is to have a solid team. Then, you should measure their communication and problem-solving skills and enhance them to provide an efficient customer experience. Besides, you can form a loyalty program to improve their customer experience and accelerate your interactions on social media.
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