If you own a business, you know that acquiring new customers is important. But what’s even more important is maximizing customer lifetime value and making sure that those customers stick around.
As I’ve discussed in previous posts, new customer acquisition is awfully challenging (and expensive) – it costs anywhere from 5 to 25 times more to acquire a new customer than to retain an existing one (HBR).
As you likely know, the real profits in any business are in the back-end, not in the initial sale. In the majority of businesses, it’s very hard to break even on the front-end and you might even have to lose money on the first sale to a new customer.
Maximizing customer lifetime value should be a top priority for any business owner who wants to increase profits, reduce churn, and enable sustainable growth. By focusing on CLV, you can create long-term relationships with your customers that will benefit both them and your bottom line in the years to come.
Maximizing customer lifetime value is the best internal growth strategy out there.
But how, exactly, do you go about maximizing customer lifetime value?
Keep reading to find out.
What is Customer Lifetime Value?
In business, customer lifetime value (CLV) is the total amount of money that a customer is expected to spend over the course of their relationship with a company.
CLV is a key metric because it allows you to see not only how much revenue a customer brings in during their time with the company, but also how long they are likely to remain a customer. This information can then be used to make decisions about marketing, product development, and multiple other areas of the business.
There are a number of different ways to calculate CLV, but the most common approach is to look at the average amount a customer spends over the course of their relationship with a company, multiplied by the average length of that relationship.
So, for example, if a customer spends an average of $100 per month with a company and has a relationship with that company for an average of 24 months, their CLV would be $2,400.
CLV is an important metric for businesses because it can help to:
- Make decisions about where to allocate marketing resources
- Determine which product development initiatives are likely to be most successful
- Predict future revenue streams
- Manage customer churn (especially for top customers)
- Get increased clarity on prospect lifetime value (what is a prospect worth on average?)
When used correctly, CLV can be a powerful tool for businesses of all sizes. By understanding their customers’ lifetime value, businesses can make strategic decisions that will improve their bottom line and keep their high value customers coming back for more.
If you don’t have a firm sense of what your customer lifetime value is currently, I’d recommend prioritizing this. Knowing your numbers for CLV (and a handful of other critical metrics) gives you a foundational basis for how you test new offers, track improvements, and continuously run your business.
We want to make decisions based on on black and white numbers, not on hope.
Maximize Customer Lifetime Value – Your Internal Growth Strategy
Reduce Customer Acquisition Costs
This is the amount of money that you spend on marketing and advertising to acquire new customers. Of course, the lower your acquisition costs, the higher your CLV will be.
One highly effective way to do this is by implementing a referral program. If you’d like to learn more, I’ve posted a detailed walkthrough of how to increase referrals within your business.
Even though customer acquisition costs are one of the biggest determinants of CLV, many businesses skimp on marketing and advertising in an effort to save money. This is a mistake! A well-executed marketing campaign can result in more customers, which leads to increased sales and revenue—and ultimately a higher CLV.
One improvement opportunity I continuously see in businesses I work with is that they typically give up on unsold leads. If someone has expressed interest in your products or services, look for ways to make that lead profitable (could be through ongoing email follow-up or reselling the lead to one of your competitors).
Increase Customer Retention Rates
One of the best ways to maximize CLV is to increase customer retention rates. The longer your customers stay with you, the more they’re going to spend. In fact, according to Bain & Co, increasing customer retention rates by just five percent can increase profits by 25 to 95 percent. The punchline: keeping your top customers is incredibly valuable.
One of the best ways to create loyal customers is to delight them—to give them an experience that goes above and beyond their expectations.
There are a number of ways to do this, but some of the most effective include personalizing the customer experience, showing your appreciation, and following up after a purchase.
As food for thought, some ideas for personalizing the customer experience include:
- Addressing your customers by name in all communications, whether it’s an email, a letter, or even a receipt
- Use customer data from previous interactions—such as purchase history—to make recommendations for future purchases.
- Create targeted marketing campaigns based on customer location, age, gender, etc.
You should also make sure you’re delivering on your promises and providing a high-quality product or service. If you can resolve problems quickly and efficiently, you’ll build loyalty and trust among your customer base—and that will go a long way towards maximizing customer lifetime value.
Offer customer loyalty programs and discounts for repeat customers, and send thank-you notes or gifts for referrals.
These small gestures can go a long way in building long-term customer relationships and increasing customer lifetime value.
Lost Customer Reactivation
Another great strategy to increase retention is to focus on lost customer reactivation.
Lost customer reactivation is the process of trying to win back customers who have stopped doing business you (for any variety of reasons). This can be done through various methods such as special offers, personalized messages, or reaching out to them directly.
The goal is to re-engage these customers and get them interested in your products or services again.
Leverage Existing Assets
You likely have quite a few things working well in your business already. I’d recommend leaning into them and thinking about how you can better leverage these assets. Do more of what works!
A handful of ideas:
- What was the most successful promotion you have ever run to your customer list? Is there an opportunity to run this again?
- How frequently do you communicate with your existing customers? Do you actively communicate with these folks through email or phone? (Hint: almost no business contacts their customers as often as they should!)
- What is your most successful form of advertising? Where are you generating the majority of your customers?
- What is your onboarding sequence for new customers? Is there a way to improve how your process for cultivating the customer relationship?
- Have you run a survey to your existing customers? Is there something they are asking for that you’re currently not offering?
How to Increase Revenue from Existing Customers: Order Size and Frequency
Another great way to maximize CLV is to increase average order size and frequency. If your customers are buying more from you more often, they’re naturally going to generate more revenue over time. There are a number of different ways you can approach this.
First, try upselling and cross-selling products and services that complement what your customers are already buying from you. For example, if someone comes into your store looking for a new pair of shoes, you could try upselling them on getting a new pair of socks as well.
Second, offer discounts or loyalty rewards for larger orders or increased frequency of purchase. Is there a way for you to incorporate bulk sales at a discounted rate?
The rationale behind this is that product A costs $200, but you can get A, B, and C for only $400. This ends up being 50% off the total price. This entices people to buy more, while they have the perception of saving money.
And third, make it easy for customers to buy from you by offering multiple payment options, free shipping, and fast delivery times.
Limited Time Discount Special
How frequently do you send out an irresistible offer to your customers that’s only valid for the next 48 – 72 hours?
This is a slam-dunk opportunity to increase customer lifetime value if you aren’t executing on it already. The best part is it can be repeated once a month (or more) and translate to a significant uptick in sales.
Here’s the gist: create a multi-step email sequence with a special offer at a significant discount (50%+) along with a strong ‘reason why’ you are making the offer. Marketer Frank Kern originally popularized this through a concept called ‘4 Day Fast Cash.’
Add Continuity and High Ticket Offers
The intent of the first sale is to transition a prospect into a buyer. A couple of the best ways to maximize customer lifetime value are to incorporate continuity or high ticket offers into your business.
I’ve previously put together a detailed post on exactly how to craft high ticket offers for your top customers. I’d recommend checking it out if you’re interested in learning about how to maximize CLV.
For continuity, think about how you could turn a single sale customer into an ongoing buyer. Any business with regular visits could easily make use of this (i.e. chiropractor, dry cleaners, florists).
Health supplement companies do this regularly through promoting auto-ship on a monthly basis, which results in very predictable monthly recurring revenue (MRR). Heating and air conditioning companies follow a similar approach by selling yearly maintenance packages.
As a side note, MRR is a major variable to try and incorporate if you are considering selling your business (your valuation will be 4-5X higher with MRR vs. static revenue).
If executed properly, raising prices can be an effective way to increase CLV with minimal (if any) impact to retention. You never want to be a commodity stuck in a price war to the bottom.
Continuous Communication for Customer Longevity
It’s not enough to simply provide a great customer experience—you also need to stay in touch with your customers so that they remember you when they’re ready to make another purchase.
Remember: your customer list is the lifeblood of your business and cultivating the customer relationship is critical. Your greatest asset in your business is not your products or services, not even your employees. Your relationship with your clients and loyal customers is where the true value is. Increasing your number of touchpoints will be well worth it in the long run.
As long as you are providing value (and aren’t boring your customers), I truly believe that it’s impossible to communicate too frequently.
Consider having someone on your team send handwritten thank you notes to past clients for their purchases. A personal example: my wife and I recently bought a couch and were thrilled when we got a personalized handwritten note a few days later. It didn’t take much effort on their part but I can tell you, I’m not sure there’s anything you could do that’s more powerful for customer satisfaction. We are now customers for life.
Along these same lines, make periodic calls to your customers just to check in and see “how things are going.” This is not a “sales call” in anyway, you are just calling to say hi and see if there’s anything your business can do better. This sort of thing builds massive goodwill with customers.
There are a number of ways to stay in touch, but but a customer newsletter is the single best way to retain an existing customer (and in turn, maximize customer lifetime value) that I’ve ever come across.
If you only had $200 a month for marketing and asked me what to do – I’d say to create a customer newsletter.
This would be a paper newsletter that you send in the mail, since direct mail is on average 3-4 times more likely to be read than emails (Small Biz Trends).
You’ll want to provide valuable educational information while injecting your personality and keeping them updated on special events in your business. You’ll stay top of mind with your customers and also be branded as a helpful expert.
Some ideas for what you could include in this newsletter:
- “How to” articles (if you are a landscaper, could be “how to prepare for spring”)
- Talk about upcoming events in your business
- Include customer testimonials and success stories
- Introduce a team member each month, so your customers get to know you better
- Give exclusive deals and coupons
If this sounds intimidating, consider creating a postcard “newsletter” with 5 quick tips you mail regularly to your existing customers. This would be much quicker to produce and be significantly more affordable.
The key is to keep contacting your customers and always provide them with some type of value when you reach out.
Make it Easy for Customers to Give Feedback
One of the best ways to find out what your customers want and need is to simply ask them—and make it easy for them to do so!
Your customers should not have to jump through any hoops and the process to give feedback should be straightforward and frictionless.
There are a number of ways to collect customer feedback, but some of the most popular include surveys, polls, and social media platforms like Twitter and Facebook. Staying in touch with your customers also allows you to address any concerns or issues they have in a timely manner.
As a business owner, maximizing customer lifetime value should be one of your top priorities.
By understanding CLV and taking steps to increase it, you can boost profits, reduce customer churn, and make your business more sustainable in the long term. It will allow you to create long-term relationships with your customers that will benefit both them and your bottom line.
In this post, we covered a number of strategies to improve CLV, but I want you to simplify the process and just pick one strategy to implement for now. Take action and get it rolled out.
I’d love to hear how it works for you. Leave a comment and keep me posted on your progress.
Start working on maximizing CLV today.