Customer Lifetime Value – How to Calculate, Measure, and Increase It?
Customer Lifetime Value (CLV) is the crucial parameter through which businesses predict future demand, strengthen their promotional campaigns, and make better decisions.
So, it is all about retaining customers. CLV helps you understand the untapped potential hiding in your existing customers, and existing customers are likely to spend 67% more on average. Studies reveal that it costs five to ten times more to find customers than to sell to your existing customers.
You can grow your business without adding new customers when you increase your CLV.
How to Calculate the Customer Lifetime Value?
Customer Lifetime Value (CLV) = Average Order Value (AOV) x Average Frequency of Purchase (AFP) x Average Customer Lifespan (ACL)
How do I understand this?
Let me help you here.
I have been with my mobile service provider since 2005 and will likely be with him for another 20 years. So my Average Customer Lifespan is 37 years. My AFP is once a month, as it has a monthly cycle, and my AOL is about 1000 bucks per month.
So, my CLV is 1000 x 12 x 37, which works out to 4,44,000/- Let us assume if they retain all their customer for this long, then you can calculate their projections.
How Many Customers Can They Retain for That Long?
Here, I have taken into account only my mobility. I haven’t taken into account the other services that they provide. Their Internet connectivity (Broadband and leased connectivity), DTH, and entertainment service.
In fact, I did subscribe to their broadband and landline connectivity in 2005, and I continue to use them. They allowed me to club all the mobile service connections in my home, and now I pay an average monthly fee of 3000 bucks, all put together.
How does it work?
I don’t look beyond this provider when it comes to mobility, Internet connectivity, DTH, or entertainment. They provided me free subscriptions to multiple OTT providers for a quarter. I have extended some of those subscriptions, which might bring them additional revenues.
How to Increase Customer Lifetime Value?
They provided an excellent customer experience that made me happy as a customer. Some of the key things they did include:
- My mobile bills are always itemized. When I wanted ISD added to my plan, it was just a call from me, and they activated it.
- Whenever I miss a payment cycle, they don’t add fines or late payment charges as long as it doesn’t breach my credit limit. The limit they have set for me is relatively high
- I haven’t had any issues with the network coverage or availability of signals.
- As far as my broadband goes, I have never had to call them for faulty service, which worked even during the cyclone of 2015. I have barely had to call them twice when I shifted my house, and hence the connection address
- Their DTH comes reasonably priced and covers most things I need at minimal pricing. They provided me with custom options to choose the channels that I needed. Besides, they added multiple OTT platforms for free for a quarter.
What Else Can They Add to Make My Experience Better?
As a longstanding loyal customer, they should let me have the provision to reach an agent in their contact center quickly. My bank allows me that privilege.
Besides, they should have a relationship manager who should apprise loyal customers like me with their new offerings and be reachable for any service queries we may have.
How Do You Get This Right?
It is straightforward. Invest in a contact center platform with tight integrations with your CRM and other IT systems. This would allow you to identify the stage of your customers and give you information on what can be offered to them.
Once you have this information, your contact center platform takes over the promotions – voice, email, text, broadcast messaging, and surveys, among others. This would allow you to understand the needs of your customers granularly. You can continue improving your promotions and sign up your existing customers for additional services, thereby increasing the CLV.
Customer Lifetime Value (CLV) also gives you an idea of how much you can spend on customer acquisition. It helps you structure your promotions and offers for profiles similar to your existing customers.
Even an increase of 100 bucks on the average order value increases your revenue substantially, as it is spread across all your customers. Just imagine, if you can get your customers to buy more often, then that again increases your revenues manifold.
Have laser focus on your existing customers and provide them with everything they need. Most things you offer would likely be natural additions to your current customers.
I am sure it would also spill over to your new customers.