Acquiring a new customer can be up to 7 times more expensive than retaining an existing one, underscoring the cost-effectiveness of retaining current customers.
A key thing to look at here is Customer Lifetime Value (CLV or CLTV). This isn’t just a number. It’s a really important metric for making strategic decisions for your customer's acquisition, and retention strategy, as well as making your business more profitable.
In this guide, we’ll explain what CLV is all about. Let’s start exploring how your customers (and especially loyal customers) are essential for your business’s growth.
1. Understanding CLV: The foundation of profitable customer relationships
1.1 CLV: A key metric for long-term success
CLV represents the total profit a customer brings to your business over their entire lifespan as a customer. Unlike satisfaction-driven KPIs like NPS or CSAT, which only predict potential revenue, CLV offers a tangible measure of actual profitability over time.
Let's have a look at some numbers:
- It can cost up to 7x more to acquire a new customer, while it’s 5x more cost-effective to retain an existing one.
- The probability of selling to an existing customer is significantly higher (60-70%) compared to a new one (5-20%).
- You could reduce customer churn rates by 11% simply by reaching out to them.
- The likelihood of an existing customer making a second purchase in the first year is 32%, making a fifth purchase is 70%, and a tenth purchase is 83%.
There is a balance to be struck to acquire new customers and optimise their experience while developing profitability.
1.2 Why emphasise CLV in business strategies?
Implementing CLV calculations helps in setting a ceiling for customer acquisition costs, ensuring that each customer relationship is profitable. This strategic focus helps in aligning marketing efforts with business sustainability and long-term customer value.
🤓 For example, If an e-commerce's average CLV is €1,000, and it costs more than €1,000 to acquire a new customer (advertising, marketing, offers, etc.), it means that it is likely to lose money.
This company should make strategic adjustments to reduce its acquisition costs and/or increase customer loyalty to increase CLV.
1.3 How to calculate CLV
Before diving into CLV calculation, remember that a solid acquisition strategy is vital.
Assessing Customer Acquisition Cost (CAC) through various channels like SEA, social ads, or affiliate marketing is key to understanding the full picture.
The formula to calculate CLV is:
CLV = Customer Value (CV) x Average Customer Lifespan (ACL)
CV = Average order value x Average purchase frequency
ACL = Average of years a customer stays active (Nb of days between the first order and last order date) / Total number of customers
2. Enhancing CLV: 4 proven strategies
2.1 Boosting the average transaction value Average Order Value (AOV)
When you increase your average transaction value, you’re maximising your CLTV.
To increase their AOV, businesses have several strategies at their disposal. Apart from raising prices, you can also sell more products in each transaction, a method known as cross-selling. Another effective tactic is product bundling.
Cross-selling and product bundling can be implemented in various ways:
Based on the product purchased: Suggest products that are directly related to the customer's current purchase. For instance, if a customer buys laptops for their sales team, recommend laptop cases as an additional item or part of a bundle. This approach can effectively increase the value of each transaction.
Using sales or browsing history: Personalise offers based on the customer’s previous purchases or the products and pages they have shown interest in. This aligns the cross-sell or bundle with the customer's specific interests, increasing the likelihood of a larger order.
Based on other customers' purchases: Inform your customers about what's trending or popular related to their interests. Influence their purchase decisions by suggesting products or bundles bought by similar customers.
Incorporating User-Generated Content (UGC), like testimonials from satisfied customers, adds credibility to these suggestions and can persuade customers to opt for higher-value purchases.
2.2 Create unique shopping experience to increase purchase frequency
When buyers find that shopping is simple, enjoyable, or exciting, they're more likely to return frequently!
Create a unique and effortless shopping experience on your website to enhance buyer’s experience:
- Significantly simplify your menu by reducing the number of items,
- Implement a “sticky” feature for your menu, ensuring it's always accessible,
- Design clear, noticeable call-to-action buttons,
- Incorporate a breadcrumb trail for easy navigation,
- Focus on mobile-friendliness, ensuring the essentials are immediately accessible from the homepage.
Ensure the consumer is guided in their purchasing journey. Utilise pop-ups not only for guidance but also to gather opt-in. Each visit presents an opportunity to strengthen the brand-customer relationship and enhance LTV.
Make it possible for customers to contact you at any moment. Implement solutions like customer support chat or customer service tools like Gorgias or Zendesk to achieve this.
Proactively responding to visitor queries, aiding in their decision-making, offering advice on popular products, and providing reassurance on purchases can initially increase the AOV and subsequently, purchase frequency.
2.3 Make funnel and checkout simple:
Optimise your customer journey with simple product pages that convert with:
- Showcasing user-generated content (UGC)
- Product pictures
- A simple description of the product's value-added features
- Customer reviews (clickable)
- Call to action “add to cart”
- Logo of trusted providers (Alma, Trustpilot…) for reassurance
- Magazine, influencer, media outlets: anything that will give you credibility to the visitor
- Clear shipping dates and returns policy
Bigblue's Fast Tags feature provides real-time Estimated Arrival Time (ETA) of delivery based on the customer location.
👉 Increase sales at checkout and show customers the quickest delivery option available for them with Fast Tags!
What about the checkout?
A Baymard Institute study showed that 17% of online shoppers cite complicated checkout processes as a reason for abandoning carts. Other reasons included needing to create an account, unexpected costs like shipping and taxes, a slow checkout process, and a lack of trust on the website as a whole.
A solution is to implement a single-page checkout with different payment options (card, digital wallet like Apple Pay, Buy Now, Pay Later like Klarna…).
9% of shoppers will abandon their cart if they can’t find their preferred payment method.
Top 4 favourite payment methods:
- Credit/Debit card
- Payment via digital wallets (Apple Pay or Paypal)
- Mobile payment (Amazon Pay, Revolut, Mobiamo)
2.4 Enhance your post-purchase experience with tracking email and unboxing
The post-purchase experience is a golden opportunity to turn customers into brand ambassadors.
How to do it?
- Put sponsorship and affiliation links in the tracking emails (possible thanks to Bigblue’s tracking feature!)
- Put forward special customer coupon codes in your email or written on your packaging, thank you flyers
- Personalised packaging and free goodies
- Ask for customer reviews or UGC, and add a QR code to streamline the process!
- Push educational content on the product
Embracing CLV for sustainable growth
Optimising your CLV is not just about boosting short-term profits.
It is about building sustainable, profitable relationships that benefit both your e-commerce company and its customers. By strategically aligning acquisition, retention, and customer experience efforts, you can unlock the full potential of CLV and drive long-term success.
Are you ready to harness the power of CLV in your business strategy?