How to Calculate and Increase Customer Value
As the economy becomes more customer-centric, providing a premium customer experience has become essential to retaining customers and increasing profits.
By analyzing different market segments and their customer value, companies can strategically target the best customers to build customer loyalty, improve service, and attract other valued customers.
What is customer value?
The customer lifetime value (CLV) is the estimate of the sum of the profits that a company hopes to earn throughout its relationship with a given customer.
Why is customer value important?
To put it simply, knowing how much your customers can bring to your business helps determine how much you can invest to attract and retain them.
In addition to the CLV, if you calculate your customer acquisition cost, you have the basis to measure the return on investment from the acquisition of these new customers.
Instead of basing yourself on generalities or misconceptions, especially the Pareto principle or the famous principle “acquire new customers costs 5x more than to retain them”, perform your own calculations will allow you to establish a framework accurate for your operations.
It should be emphasized that calculating the value of your clientele as a whole is misleading. Indeed, very different customers can be classified in the same category while they do not have the same value for your company.
To properly understand your customers, costs and financial benefits, you need to segment your market.
Customer segmentation and CLV
The goal of segmentation is to establish groups of customers with similar needs to increase the efficiency of your business.
When it comes to customer value, you can identify groups based on their budget and the length of your relationship, identify and minimize problem areas and why your customers stop using you, but also take measures to increase the value of life for this group of customers.
Segmentation can be done according to different criteria.
The way you segment your customer base depends on the nature of your business and the type of customers you interact with. B2B companies can segment according to business sectors or turnover, for example.
B2C companies can look at demographic and psychographic data or style and place of life.
To learn more about segmentation click here.
What are the benefits of segmentation?
By segmenting your customers into different groups, you can define the categories that are most profitable for you.
This strategy allows you not only to retain your existing customers but also to use this information to acquire new ones.
Measure and improve your ROI from acquiring new customers
Identifying segments with high customer value allows you to prioritize these groups, focus your marketing strategy on their needs, and invest more money in acquiring new customers.
Understand key decisions
Among your existing customers, a specific category may have chosen your company for the same reasons.
Using this information as part of your marketing strategy helps to position your business much more effectively.
Improve your retention marketing
In the same market segment, your customers may have decided to stop using you for the same reasons. Identifying these reasons allows you to tailor your products and marketing strategy to focus on these problematic issues, and therefore increase your CLV.
Improve your customer service and promote customer loyalty
By using CLV to identify your most valuable customers, you can pay them special attention. By strengthening your relationship with them, you limit the risk of losing your most loyal customers.
Prioritize products to improve
Not all industries are looking for the same products or features. By understanding these different groups and focusing on the most important customers, you can use the information collected to develop new products and improve your offer.
How to calculate the CLV?
There are many ways to calculate customer value.
Since this calculation can be influenced by the churn rate, discount rate, profit margins, royalty costs, and other factors, more and more variables can be taken into account.
The best formula depends on the product or service you sell. So do some research to determine the formula that suits you best.
The simplest way to calculate customer value is the following formula:
CLV = (Average order value) x (Number of sales) x (Average duration of the relationship)
If this formula does not seem quite elaborate, then read this university study of 55 pages on the value customer life, which proposes, in particular, the detailed formula below:
If you’re like me and this formula gives you a headache, you can still analyze your customer groups using the other, much simpler formula. Although the latter does not take as many variables into account, and can, therefore, result in more approximate results, it will allow you to learn a lot about the needs of each group.
For more accurate calculations, you will certainly need to find out what is the most appropriate formula for your business.
How to improve the CLV?
In general, improving your customer value is like improving your customer experience. Here are some tips to improve both.
- After-sales communications, including tracking emails or mobile-based messages, can help improve the customer experience and answer frequently asked questions.
- Use customer service to enhance the customer experience. Any interaction with a customer is an opportunity to increase the value of your business. Research shows the critical role customer service plays in building customer loyalty and pushing you to recommend your business.
- Consider the feedback you receive, especially from your loyal customers, to improve your product and customer experience.
- Personalize your content. Especially in the context of e-commerce and social selling, personalization can make the customer experience more enjoyable.
- Reward loyalty. Whether it’s access to certain products in priority, exclusive information, events or discounts for members, reward loyalty enhances the customer experience.
- Improve membership procedures and follow-up. Some product categories require an integration process. The smooth running of this procedure is the key to getting your customers to make the most of their purchase. The more benefits they receive, the more likely their customer value will be.
- Encourage your customers to buy more. Upgrading will improve the financial aspect of the equation, not the lifespan. Avoid giving your customers the feeling that you are just trying to get them to spend as much as possible.
Better understand your segments
Once you have categorized your customers into different groups based on their CLV, you should see similarities between these groups. Conducting further research to understand common trends can help you further strengthen the points above.
Above all, you should talk to your current customers. They represent your most precious resource.
Any initiative to better understand your customers and prospects adds value: from creating buyer profiles to finding the sectors and segments with the highest VLC.
Originally published at Entrepreneur News and Startup Guide.