Customer Lifetime Value (LTV, CLV,) is a method for determining the estimated projected revenue from a patron over the length of time they are customers of your business. When you know the value of their repeat business, you can decide how much you should invest in customer retention, as well as customer acquisition. Studying this massively important metric is critical to any business.
When you understand the lifetime value of a customer, you can make significant decisions based on:
- The direction of your product development
- The amount and type of marketing you need
- Customer service levels
- The amount of revenue you can expect a customer to generate over the length of the business relationship
Attracting and acquiring a new customer can be five to 25 times more expensive than retaining an existing customer. The longer a patron continues purchasing from your business, the greater their lifetime value becomes. You can play a key role in solving problems and offering customers your recommendations that will lead your customers to remain loyal to your company. (In marketing terms, to churn.)
How to Calculate LTV
The simplest equation to compute LTV is:
LTV = Lifetime Customer Revenue – Lifetime Customer Costs
For example, when a patron purchases $1000 worth of services or products from your business across the length of his or her relationship with you, the total cost of sales and service to the customer is the LTV = $500.
It follows that if you spend anything over $500 on marketing to acquire a new patron, you will face a negative return on your investment.
Therefore, you do not need to spend resources and time on finding a new customer; you need to keep the customers you have happy.
Many eCommerce experts like to use Starbucks as an example of the importance of taking care of the customer’s you have.
- Starbucks has an Average Customer Lifespan of 20 years.
- Starbucks has a Customer Retention Rate of 75 percent
- Their Profit Margin per Customer is 21.3 percent.
- The Rate of Discount for Starbucks is 10 percent.
- The Average Gross Margin per Customer Lifespan is $5,382.94.
- If Starbucks spends more than its average LTV ($14,099) to acquire a customer over the average lifespan (20 years), there’s a chance they will be losing money.
- Starbucks has an excellent customer satisfaction rate of 89 percent in 2002 and 78 percent in 2018.
- In 2018, the company generated more than 4.4 billion US dollars from food sales across the globe.
How Does Starbucks have Such a High LTV?
Could there be secrets in the Starbucks empire that could inform e-Commerce business owners? Let’s see:
Starbucks started its company not merely to sell coffees, but also for providing a venue where people could connect. Starbucks wants to be that neighborhood gathering place and part of its customers daily routine.
The company calls all employees “partners” because they want all involved in the Starbucks mission to experience shared success. Their mission statement is:
To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.
So maybe some of their ideas have everything to do with LTV, such as:
- Wanting their culture to be warm and welcoming
- Delivering only the best and being accountable for their results
- Finding new ways to grow their company
- Connecting with transparency, dignity, and respect
Keeping Your Current Customers Happy
Frederick Reichheld of Bain & Company carried out research that showed that increasing customer retention rates by 5 percent increases profits by 25 percent to 95 percent. Additionally, it costs six to seven times more to acquire a new patron than to keep an existing one.
Then the question becomes, “How do I keep my customers happy and purchasing?” Here are some tips:
- Offer high LTV customers special discounts
- Create a loyalty program
- Offer rewards for new customer referrals
- Provide your top LTV patrons special customer service
- Offer favored credit terms
- Publish an e-blast or newsletter that is interesting, informative and engaging
- Send emails that matter; make sure your emails are fun, helpful, and have a fantastic subject line
- Time your emails by testing your open email rates
- Engage with your customers in a variety of places and methods
- Use social connection click-points on your website for Twitter, Facebook, Pinterest, and so forth.
Genius Ideas for Increasing LTV
Most e-commerce sellers know something about the strategies we’ve already discussed, so now let’s look at a few ideas you may not have thought of before now.
A recurring subscription model in some form may be one of the best businesses tactics you ever consider. Some of the best-selling subscription services online include:
- Blue Apron
- Dollar Shave Club
- Bark Box
Here’s why these recurring purchases are such a favorite:
People love getting packages. They love getting surprises. Customers sign up for boxes that cater to their unique interests. The packages offer value (the items sent contain products sold at a fraction of their average), and all this shopping can take place in the comfort of their beds.
Upselling Your Products
This sales technique persuades buyers to buy a higher priced, upgraded, or premium version of their chosen item or other add-ons.
If a customer is buying a blender, you could use visual prompts on the product page or at checkout to suggest that he or she buy a 5-year warranty.
Cross-Selling Your Products
This tactic works at generating more sales by suggesting added, related, or complementary items to a patron who is making a purchase.
Let’s say your customer is buying a swimsuit. You can use visual prompts on the same page as the product, or at checkout to encourage the person to purchase a beach cover-up, as well.
Both examples can positively influence your LTV rates, and both provide more profits, faster growth, and less time getting your earnings.
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