Everything a CEO needs to know about optimizing customer lifetime value

Understanding your customer and knowing how to get the most out of them has got to be at the forefront of any successful company strategy in order to elevate growth and potential investment. That’s why optimizing customer lifetime value (CLV) is a business strategy that you need to be doing on a regular basis – no ifs and no buts.

CLV is defined as a prediction of profit over a customer’s lifetime with a business, minus any customer acquisition costs (CAC). The formula for measuring customer lifetime value is usually:

(Average value of a sale) x (Number of repeat transactions) x (Average retention time in months or years for the average customer)

A simple example of a business that has nailed CLV is Netflix. The video streaming giant seeks to understand its customer’s viewing habits and offers suggestions based on a customer’s activity. For example, if you watch Shawshank Redemption, Silence of the Lambs, and Schindler’s List, Netflix will recommend other 90s award winning films for you to watch. By doing so, Netflix ensures you’ll stick around and come back for more; Netflix is optimizing its CLV and increasing customer retention.

Five excellent ways to optimize customer lifetime value

In its most simple form, optimizing is about analyzing your current customer base and devising strategies to extract the most revenue from your high value customers, whilst also improving customer retention. With these five neat tricks, you’ll be seeing improvement in both these areas in no time at all.

Segment into cohorts and understand your high value customers

It’s important for operators to understand that no one customer is the same. For example, the top 1% of your customer base is worth 30 times more than your average customer. Measuring customer lifetime value gives you a ballpark figure as to how much each individual customer is worth. To really optimize customer lifetime value, CEOs need to dig a little deeper into their customer base.

A business that segments its customers into cohorts will be able to easily spot patterns in behaviour and optimize accordingly. For example, if you divide your customers into those who spend over $1,000 a year, those who spend over $5,000 a year, and the ones who spend over $10,000 a year, you can then analyze your high value customers in more detail.

For example, you notice that your high value customers are all located in a similar province, tend to spend more at a certain time of the year, and are obtained via the same acquisition channel. Now that you understand more about your high value customers, you can optimize this group, focus on retention, and ensure that the high rollers don’t splurge their money elsewhere.

Boost AOV

By optimizing CLV, operators can subsequently boost their average order value (AOV) which will equate to greater revenue. To boost AOV, you need to think carefully about what makes your customers spend more. It could be product reviews or vanity metrics such as Facebook likes or number of Twitter followers, for example.

Test pricing strategies. Is your business able to offer any sort of free incentive such as shipping or additional product? Techniques like this can add greater value to a shopping cart in the long run and help maintain a higher CLV.

Analyze churn

Nobody likes customer churn. However, it’s a natural occurrence in business. Churn measures the amount of people who leave a business over a certain time period. By analyzing this information, operators are able to analyze the type of customer who leaves their business and focus their retention efforts on that cohort, therefore actively increasing their customer lifetime value.

Nail customer service

You will struggle to have a high customer lifetime value if you aren’t optimizing your customer service strategy. Apple is a terrific example of a business that has built its brand centred around the customer. The company make it incredibly simple for its consumers to obtain technical support; they can call a hotline, visit a person in-store, or chat via the company’s website. The result? Customers seldom shop elsewhere for their tech products, therefore ensuring Apple has a high CLV.

Consistently up sell and cross sell

People who are already invested in the business are also more susceptible to upselling and cross-selling which produces greater revenue. The probability of selling to a new customer is between 5-20%, whereas the probability of selling to an existing customer is 60-70%. Therefore, it pays to have a strategy in place whereby you’re able to effectively target and up / cross sell to your existing customer base, therefore optimizing your CLV and generating higher revenue.

Optimizing customer lifetime value is a necessity when it comes to driving spending and ensuring your customers don’t shop around elsewhere. Business operators who don’t focus on optimization could see themselves falling short of targets and spending more on customer acquisition costs long-term.

Originally published on the now defunct Control blog.