Customer Lifetime Value (CLV) – How to use at Various Stages of Customer Lifecycle

Posted By: editor
Posted On: 21 Oct, 2021

For every e-commerce business, there are important KPIs to track: number of orders, revenue, AOV, etc. However, there is one metric that e-tailers may not be tracking which has the power to impact the bottom line and improve success forecasts for better decision-making.

That metric is the customer lifetime value (CLV), which will be talked about in detail in this article. It also covers how businesses can use CLV to formulate better strategies at each stage of the customer life cycle.

What is Customer Lifetime Value (CLV)?

CLV is the amount of money a customer is predicted to spend with the business throughout his/her association with it. It measures how valuable a customer is to the business over the entire lifecycle, as opposed to just their initial purchase.

Having said that, the value of customer relationships varies across the stages of the customer lifecycle. It depends on the revenues received and the costs of service (acquisition costs, costs of loyalty, promotional campaigns, etc.). And, the net cash flow received from a customer depends on the frequency and volume of purchases, the margin on those purchases, and the duration of the customer relationship.

Businesses can use CLV to understand the profit potential of customers and device proactive & reactive strategies (as below) at each stage of the customer lifecycle to optimize the total value they generate.

Uses of Customer Lifetime Value:

Acquisition Stage:

At this stage, the goal of the business is to reduce acquisition costs through highly targeted acquisition campaigns.

Marketers can use CLV instead of just using initial purchase value to accurately evaluate ROI on customer acquisition. They can evaluate the performance of channels and divert their marketing spending to the channels that got high-value customers. For instance, the CLV of a customer who came via paid search is higher than that of a customer who came via a social channel. Marketers can focus more on paid search and revise their strategy for social channels.

Retention Stage:

At this point, the goal of the businesses is to keep the acquired customer as a recurring customer, realize more value and minimize churn.

CLV analysis allows businesses to spot customers that provide lower value but show growth potential and the ones that provide high value and are likely to churn.

In the first case, where customers are not yet in the high-value category but appear to have the potential to be, businesses can devise proactive strategies to sell additional (cross-sell), higher-margin (up-sell) products. This way, businesses can encourage customers to do frequent purchases and stay longer with the company.

On the other hand, where customers provide high value and are likely to churn, businesses can proactively devise promotional campaigns and schedule them in a timely fashion. Businesses can make these strategies more impactful by studying the purchase behavior, demographic characteristics of the customers.

There can be customers who fall into the high-value category but have churned due to poor service or product satisfaction issues. Businesses can devise reactive strategies to win them back. They can offer incentives (discounts, upgrades, bundles), launch campaigns highlighting improved services, or remind customers of what they are missing out on.

The other set of customers are those, who even after retention efforts, do not provide value to the business. In such scenarios, it is beneficial for businesses to avoid spending on them.

Loyalty Stage:

At this stage, CLV potential is attained. Businesses can reactively engage the high-value customers with preferential treatment and turn them into brand advocates. For instance, businesses can invite such customers to special events and also offer deals/ promotions tailored for them. They can also take better care of their biggest customers by providing them with an individual assistant or routing them to a more experienced call center.

Businesses can proactively determine the specific factors that these most profitable customers have in common. Armed with this information, businesses can focus on ad spending, e-mail campaigns, reward offers, etc. on the right customer segment with messaging that has proven to deliver the best results.

Conclusion:

Customer Lifetime Value is one of the most critical metrics for businesses that adopt a data-driven approach. It gives insights into how much a business should spend on thier marketing activities in order to achieve total long-term revenue goals.

Businesses can use CLV to maximize the revenue they realize at each stage of the customer lifecycle. They can do this by devising both proactive and reactive strategies as discussed above.

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