Data suggests that the second option has higher effectiveness. One of the reasons is that selling your other products or services to people who have already used your products or services will be much easier.
Beyond the financial benefits, maintaining long-term relationships with customers can also improve brand reputation by turning your customers into brand ambassadors. If you want to experience such benefits, here is a brief manual about customer lifetime value:
Customer Lifetime Value (CLV or CLTV) in marketing refers to the net profit contributed to the entire future relationship with a customer. The term was introduced in 1998, from the book "Database Marketing," which describes some working examples and models. In a simple commerce example, measuring customer lifetime value can be done with this formula:
Customer Lifetime Value (CLV) = (Average Purchase Value x Purchase Frequency) x Average Customer Lifespan
or to make it simpler:
Customer Lifetime Value = Average Customer Revenue x Average Customer Lifespan
For example: $100 average purchase value spend once every month and that customer uses your services for 12 month: $100 x 12 = $1200
To increase the LTV, we need to increase the basket size (through average purchase value spend – buying more – cross-selling/upselling), increase the margin (premium brand), and optimise the customer retention process to increase customer lifespan (Constant Engagement & Winback).
According to Forbes, there is an old rule suggesting the cost of acquiring a new customer is five times the cost of retaining one. Let's check if this rule actually holds in the new digital world.
As a digital full funnel integrated agency, ADA has the experience of driving both customer acquisition and engagement using paid media and owned channels. Companies can buy media, and the cost per thousand impressions (CPM) can be between $2.5 and $9. Using owned channels like email, the CPM equivalent (the users who actually opened the email) can cost between $2 and $8. With owned channels, cost can be cheaper than paid media if you know your customers already. If we take the high end of the media CPM ($9) against the low end of the owned channel ($2), the old rule of acquisition cost being five times the cost of retention is kind of true.
There are many ways to increase customer lifetime value, from providing good customer service, using a subscription model, to paying attention to the customer lifecycle.
Here is the full explanation:
Exceptional customer service is the foundation of customer loyalty and increased CLV. It involves actively listening to customers, responding to their needs promptly, and going above and beyond to ensure their satisfaction.
By consistently delivering outstanding service, you can retain existing customers better, encouraging repeat purchases and referrals, which lead to higher average customer lifetime value.
Personalisation involves tailoring your interactions and offerings to match individual customer preferences. Leveraging data analytics, you can gain insights into customer behaviour, purchase history, and preferences, allowing you to provide relevant product recommendations, content, and offers. Personalisation enhances the customer experience, making customers feel valued and understood.
Subscription models offer customers the convenience of regular, scheduled deliveries or access to services for a recurring fee. They provide a predictable revenue stream and foster customer loyalty by simplifying the purchase process and encouraging ongoing engagement. Customers often appreciate the cost savings and convenience of subscription options.
Cross-selling involves suggesting related products or services when a customer makes a purchase, while upselling encourages customers to upgrade to a more premium or feature-rich option. These techniques can increase the average transaction value and maximise revenue from each customer interaction which leads to higher customer lifetime value.
Loyalty programs reward customers for their continued patronage. These programs often include points, discounts, exclusive access, or special offers for loyal customers. By incentivizing repeat purchases and engagement, loyalty programs not only increase CLV but also create a sense of belonging and appreciation among customers.
Email marketing is still a good option for nurturing customer relationships. It enables you to stay in regular contact with customers, providing updates, personalised recommendations, and exclusive offers. Effective email marketing keeps your brand top-of-mind, encourages repeat purchases, and can even re-engage inactive customers.
Consistently delivering high-quality products or services is fundamental to building trust and loyalty. Satisfied customers are more likely to become repeat buyers, brand advocates, and sources of referrals. Quality assurance and continuous improvement efforts are essential to maintain customer satisfaction.
Actively seeking and acting upon customer feedback is a proactive approach to improving products, services, and the overall customer experience. By addressing pain points and implementing customer suggestions, you demonstrate your commitment to meeting customer needs and expectations, which can lead to increased loyalty and CLV.
Customer segmentation involves categorising your customer base into distinct groups based on shared characteristics, behaviours, or preferences. This segmentation allows you to tailor marketing efforts to each group, creating more personalised and targeted campaigns that resonate with specific customer segments.
To increase the Customer Lifetime Value, we could sell more, increase the brand values (or margin), and reduce the churn rate. To do that, companies need to understand their customers. In the digital world, customers leave different digital signatures on various touchpoints. The closest signatures with customers’ direct consent are the zero-party data and first-party data.
A Customer Data Platform (CDP) can capture data from various silos, transform them into a single model for segmentation analysis. Once the cohorts or segments are identified, companies can then develop specific contact strategies to engage with these customers to drive better engagement, upsell / cross-sell, and retain customers.
In the contact strategy development, we look at the 5W1H. What does it refer to?
ADA typically co-creates the customer journey with companies via the design thinking workshop with multiple stakeholders. Our design thinking workshop typically takes about two months from planning to making the final deliverable presentation.
ADA engaged with a major quick-service restaurant in Malaysia. As the restaurant chain just launched a New Member Loyalty App, its User Adoption and Retention of App Loyalty Programme remained low. Though they had successfully acquired over 1 million users in the past, over 90% of them uninstalled or stopped using the app, leading to a high churn rate.
To tackle this challenge, ADA used a Customer Data Platform (CDP) to collect the users' behaviours, transaction information via the App and (Point of Sale) POS. we then analysed the data in the CDP and developed ten cohorts for different engagement and retention tactics. As a result, the restaurant chain was able to retain 50% of the users instead of just 10% of the users. The monthly transactions also jumped from 14,000 to 110,000.
In another case, ADA partnered with a leading eCommerce company specialising in beauty and wellness products in India. ADA undertook an analysis of their vast customer base comprising 35 million individuals, with the goal of segmenting its audience. By applying the K-Means clustering approach, ADA successfully identified four clusters of consumer personas based on their level of engagement, interactions, and spending history with the brand.
The company leveraged the resulting customer insights to launch targeted marketing campaigns aimed at each of the four distinct audience segments, which, in turn, led to a 5% increase in sales and saved 30% of their advertising spend after optimisation.
Those are some steps that your company can take to increase customer lifetime value (CLV) and utilise the data that you have. Discover how ADA can be your company's data and AI solution for business growth.
Contact us to find out how your business can stay relevant in the digital age!