6 Steps to Increased Customer Lifetime Value (Part 1)
The health and strength of a brand can be easily measured by the number of repeat purchases from existing customers. For this reason, retaining customers and increasing their lifetime value should be at the core of business operations.
It’s well known that acquiring new customers is more expensive than retaining existing one. This is because acquisition is mainly based on advertising. If new customers don’t come back, then your return on ad spend remains fixed, while the customer lifetime value is low.
Building customer lifetime value and earning increasingly repeat business is certainly doable, but it takes time. This value can’t be created instantly. There are certain steps and specific governance that make this effort actually yield results. We’ve broken it down into 6 steps that will help you grasp the complexity of such an effort and also the results it will harvest. Take a look below at the first 3 steps and how they can help you get started.
1.Calculate CAC & Customer Lifetime Value
There’s a distinctive difference between customer acquisition cost and cost per acquisition. Many times analytics refer to CAC and CPA as the same. But cost per acquisition only tracks conversation and the measures the cost of it. This can be in terms of account registration, email signup, lead-form submission or free trial signup.
Customer Acquisition Cost
The customer acquisition cost actually tracks the customer, which means those leads who actually purchased a company’s product or service. It’s usually a more suitable metric for ecommerce businesses. It’s an easy formula based on the total spent on acquisition and the number of customers acquired.
However, we are not just looking to acquire new customers, we are looking to increase CLV, so the customer acquisition cost is not the ultimate metric here. It’s just the starting point. It gives you the foundation you need to calculate customer lifetime value, as this is what will finally help generate more revenue from each consumer.
In order to calculate customer lifetime value, you need to take into account repeat purchases and the average value of each purchase. The retention period is also an important factor. There’s not just one formula for calculating CLV, and most companies customize the equation as it makes sense for their specific type of business. However, in a simplified concept, a template formula would look like this:
CLV = Single sale average x Repeat purchase average x Retention period average
Of course, a business has different type of customers and their lifetime value will differ. To get more insight, you can segment CLV by acquisition channel or by frequency. Any business will have low but frequent spenders, as well as high spenders with low repeat transaction average. This is why the next step, segmentation, is very important before drawing any conclusion on CLV and ROAS.
2.Segment CLV & Recalculate
The customer lifetime value is a metric that’s highly dependent on your customer acquisition model. It’s also very important to note that there is no absolute value, but rather CLVs. Therefore, segmenting customers based on the lifetime value is necessary in order to get a more accurate picture of who are your most profitable customers and where to find them.
Ideally, a business would have an equilibrated bell curve when it comes to the value of its customers. Non-profitable customers, aka one-time buyers, would equal about 20%. Highly profitable customers would also make for another 20%. Your average profitable customers would fill in the rest of 60%.
Whatever this segmentation looks like for your business, there’s steps you can take to improve performance for each of them. The clearer the picture, the better strategies you’d be able to craft. Here are a few ideas on how to improve each segment:
- One-time customers - since they cost more to acquire, a simple way to improve performance of this segment would be to increase the average value of a first sale. This also helps your bottom line.
- Repeat customers - since they are already profitable, you have several methods of improving performance here, from trying to raise the AOV or increasing frequency to retargeting for loyalty.
- Loyal customers - these are your most profitable customers and a simple way to retain them and improve on their experience is to continue the after-sales process in order to strengthen their connection with the brand.
With this better understanding of segmentation and how customer lifetime value comes into play, you can start recalculating by taking into account Extended lifetime value, especially if you sell products or services that can be divided by lines. This is because lines usually contain products or services that naturally upsell one another.
Whether your customers buy the entire line in one purchase or over an extended period of time, the numbers change either way. In the first instance, your CAC drops, while in the latter, your CLT increases.
3.Optimize campaigns accordingly
The segmentations of customer acquisition costs and customer lifetime value give you the right foundation to optimize campaigns. You’re basically looking at lowering your CAC for one-time buyers and increasing ROAS for repeat customers. This will primarily help improve your conversation rate and give you the right avenue to adjust your bids.
Higher CLV and lower CAC will help you optimize campaigns towards a higher return on ad spend. This will help you somewhat control the customer journey in a way that allows you to guide your leads through relevant, as well as profitable products. Ideally, this will shed light on not only who are your most profitable customers, but also what products generate the highest return for you.
To Be Continued
Check back tomorrow as we continue this exciting journey to higher customer lifetime value and lower acquisition costs.