The Significance of Customer Lifetime Value

Customers are one of the most important and valuable sources of revenue to businesses.   They invest in goods and services and consequently influence the success of a business.  Customers help businesses grow and maximize profits.  Therefore, it is imperative that businesses make efforts to build strong relationships with their customers, know who their customers are and what they need in order to develop the best quality products and services that satisfy their needs.  This enables businesses to stay ahead of their competitors, achieve customer satisfaction, repeated purchases, and long-term growth or customer lifetime value.

Customer lifetime value (CLV) is an essential metric used in business because it provides insight to determine the amount of profit a business can potentially generate from a customer over the lifetime of the customer relationship.  It also helps businesses understand how to save money and identify and segment the categories of customers that benefits the business most.  Customer lifetime value aids businesses in retaining and increasing the value of their existing customers.  Moreover, increases in customer lifetime value reassures businesses that they are making a positive impression on their existing customers.  It informs businesses of opportunities for improvement as well as how much customers favor their products or services. 

It is crucial for businesses to maximize their efforts on increasing customer lifetime value because the higher the customer lifetime value, the larger the profits.  Businesses can increase their customer lifetime value in a number of ways.  The methods businesses can utilize to maximize their customer lifetime value include:

  • Personalize the Customer Experience:

Develop a close, long-lasting relationship with customers to make them feel more appreciated.  This will increase a business’ chances of the customer making repeated purchases.

  • Improve Customer Satisfaction and Loyalty:

Keeping customers happy is a simple and effective way to increase customer lifetime value.  Customer surveys can be conducted frequently to determine how businesses can improve customer service and address customer issues, concerns, and inquiries efficiently and effectively.  Improving satisfaction rates among existing customers leads to increased purchases in the future.

  • Utilize the Freemium Pricing Strategy:

Customers are offered a basic version of a product or service for free and provided options, upgrades, or access to more features or premium services at a price.  This strategy enables a business to have their product or service accessible for all customers while maximizing their profit.

  • Develop Customer Loyalty Programs:

Loyal customers are rewarded for their repeated purchases by offering opportunities to save money, earn points, and other promotional incentives that benefit them for their future purchases.  Customer loyalty programs increases customer retention and better customer communication. 

  • Establish a Seamless Buying/Shopping Experience:

Customers should have a buying or shopping experience that is easy and simple.  Eliminate hinderances or roadblocks that may discourage first-time buyers and current customers and cause them to stay away from the business or brand for good. 

As mentioned previously, increasing customer satisfaction is one of the most effective ways to increase customer lifetime value.  For instance, years ago, Bain & Company along with Earl Sasser of Harvard Business School analyzed the revenues and costs originated from customers over their entire purchasing life cycle.  They concluded from their studies that loyal customer relationships generated big returns.  In fact, increasing customer retention rates by five percent increased profits by 25% to 95%.  The study also showed that it costs six to seven times more for businesses to gain a new customer than to keep an existing customer.  In 2002, Starbucks, an American multinational chain of coffeehouses and roastery reserves had proven the theory to be true by attributing their success to its high customer satisfaction rate of 89%.  Furthermore, their customer lifetime value was estimated at $14,099 due to high customer satisfaction.  This meant that Starbucks must spend less than $14,099 to acquire new customers over the course of an average customer lifespan of 20 years.  Eighteen years later, in 2015, Starbucks achieved a record $19.2 billion in annual sales due to their increases in customer satisfaction.

Customer lifetime value (CLV) is vital to businesses because it positively impacts and increases customer retention rates, profitability, growth, and brand loyalty yielding long-term optimal results and success.  It also provides a competitive edge over competitors.  Focusing on customers and attaining customer satisfaction encourages customers to make repeated purchases which in turn creates a source of revenue that is cost-effective.  Therefore, customer lifetime value provides great potential for profits.

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