Amy Hardison White

How to Boost Your Business with Lifetime Customer Value

Customers are the lifeblood of your business. Without them, you’d eventually close your doors. And it’s a lot less costly to sell to someone who has already purchased from you. According to Kissmetrics, you can expect to spend seven times more to acquire customers than to retain them!

Regardless, many businesses pour most of their efforts into acquiring new customers, with 62% reporting new customer acquisition as their highest marketing goal. Why is that? Companies may be focusing on sales numbers without taking into account a critical business metric: Customer Lifetime Value (CLV).

So what is Customer Lifetime Value anyway? The name implies its general meaning: the monetary value of a customer over the lifetime of their relationship with your business.

Coming up with a number associated with CLV can be a simple or complex undertaking, depending on your preference. There are number of different ways to calculate CLV based on how many variables you’d like to include in your calculation. Here is the most simple calculation:

Customer Lifetime Value = (average # of years a customer is active) x (average annual customer contribution)

Other common factors that can be included in the calculation are:

  • How much did it cost you to acquire a customer?
  • How much does it cost you to maintain a customer?
  • What is the value of referrals the customer provides?

Let’s take Bob as our example - he has a pool cleaning service that he started twenty years ago. When he looks across his customer base, he sees that his customers average five years of activity with his pool cleaning service. Most have their pools cleaned two times per month and pay $100 per cleaning. With twenty-four pool cleanings per year at five years of activity, that’s a CLV of $12,000.

What an eye opener for Bob. Up until now, he may have been pouring his marketing dollars into new customer acquisition channels like radio and print ads. Now he can make informed decisions based on the value of customers to his business.

How much should he allocate for new customer acquisition, considering his customer lifetime value? How much should he spend in his attempts to retain a customer in danger of cancelling his service?

Bob may also be interested in increasing his CLV by 25% and he’s in luck - there are a number of ways to do that. Many of the tactics to increase CLV might seem like things that a business owner should be doing already. But there’s always room for improvement. Here are a few ways to increase CLV:

  • Honor your customer commitments. When you acquire a new customer, you commit to provide your product or service as advertised. In the case of Bob’s pool cleaning service, these are the day-to-day activities of his business: showing up when he says he will, cleaning the pool, keeping his tools and supplies current, and sending invoices when payments are due.

    Regardless of the business you are in, customers have a set of expectations about your business. If you sell a product, customers expect your product to function as advertised. Showing your customers that you make good on your promises establishes your business as a credible one that customers will want to patronize again in the future.

  • Provide excellent customer service. This is where many businesses fail. A whopping 71% of consumers severed ties with a business due to poor customer service, and in the U.S. alone, inferior customer service costs roughly $83 billion per year. So what can businesses do to create a superior customer service experience?

    • Allow customers several methods to contact your business. For Bob’s pool cleaning service, this could mean communicating with customers on-site, over the phone, and via email or other online channels. Customers should be able to contact you using the channel of their preference.

      Where one customer prefers to pick up the phone, another might prefer email or online chat. And make sure you can easily transfer information between channels. If you’re Bob, it might be the fact that you’re the only one answering the phone or email. With a larger enterprise, a unified system of recording customer inquiries (regardless of channel) will help keep all your staff informed.

    • Respond to customer inquiries in a timely manner. You can’t always pick up the phone or respond to an email right away. In those situations, give customers an idea of how long it will be before they hear back from you, and don’t let it get too long.

      Bob might have a message on his voicemail letting customers know that he responds to calls in between cleaning jobs and emails at the end of his workday. Think about good experiences when you are the customer. Maybe it’s a chat functionality that tells you how many minutes until a representative is available, or a customer service call line that calls you back (instead of having you wait on the phone).

    • Listen to customer feedback - and do something about it. When customers take the time to give you feedback about your product or service, don’t let it fall into a black hole. Bob’s customer, Sally, might let him know that she needs more frequent cleanings than Bob currently provides. Bob has the opportunity to evaluate the addition of staff to meet the increased need for cleanings.

      And don’t forget to follow-up and thank your customer and share the feedback with the appropriate internal teams. Let your customer know if you end up making the suggested changes, and consider recognizing your customer publicly for their contribution. It’s a great way to show your customer base that you strive to continually provide a better product or service.

    • Train employees to understand your products and services. Have you ever called a business you patronize, only to realize the person answering the phone has no more information than you do? What a frustrating and time-consuming experience. Make sure your staff have the education and resource to answer customer questions and meet their needs.
  • Find opportunities to give customers more. Look across your business regularly to determine where you might add value for your customer. Think about upgrading their product or service. In addition to cleaning pools, Bob might decide to clean pool equipment as well.

    He’s already cleaning his own equipment to maintain his business, so he could take on cleaning his customer’s equipment without a lot of extra time or effort. Thinking about small ways to add value for your customer will help keep them around longer. And when you eventually have to raise your prices, you can enumerate all the upgrades you’ve provided to show the extra value they’ve received - at no extra cost.

  • Find ways to sell your customers additional products and services. Once you have a solid relationship with your customers, brainstorm extra products and services that you can provide that will increase lifetime customer value. Existing customers are up to 70% more likely to make repeat purchases, as opposed to up to 20% with new customers, so the odds are in your favor.

    Bob might decide that in addition to pool cleaning, he’d like to branch out into lawn maintenance, landscaping or home repairs. He can offer bundled services to his existing customers and increase his per-visit fees.

Honoring your customer commitments and providing excellent customer service are the building blocks of solid customer relationships. Selling additional products and services can contribute even more. These tactics will help you retain customers longer, which will increase your LTV over time. Let’s say Bob is able to increase the average number of years a customer is active from five to ten. That means his CLV jumps from $12,000 to $24,000!

Targeting CLV as a key performance metric can help grow your business in a strategic way. It forces you to focus on doing what’s best for your customer, which is also what’s best for your business’s long-term growth plan.