Acquiring new customers is becoming increasingly expensive. Retaining your customer base must therefore become your priority. In fact, you have a 60 to 70% chance of making a sale to someone who has already placed an order with you. Meanwhile, the probability of making a sale to a new prospect ranges from 5 to 20%. To measure and optimize the profitability of your existing customer base, familiarize yourself with the LTV (customer lifetime value) metric. We break it down in this article!
What is lifetime value, or LTV, and how do you calculate it?
The lifetime value (LTV) or customer lifetime value (CLV) refers to the amount of profit a company generates during its business relationship with a customer.
How does LTV benefit your business?
This metric measures the long-term profitability of your customers. Calculating your LTV will help you make strategic decisions across three key areas of your business:
- Marketing: What Acquisition Budget Should You Set, and How Should You Allocate It?
- CustomerRetention: How Can You Build Customer Loyalty—and at What Cost?
- Product: How can you offer a product that best meets your customers'expectations?
Why should you include LTV calculations in your KPIs? Customer lifetime value is crucial because it allows you to forecast your long-term revenue and anticipate the costs of your marketing efforts or your customeracquisition budget.
How to Calculate Your Customer Lifetime Value?
There are several ways to calculate the LTV, some more complex than others; here is the simplest one:
LTV = customer value × average duration of the business relationship
Customer value is calculated by multiplying thepurchase frequency (the numberof purchases made by a single customer over the course of a year) by the average order value (the number of orders divided by the number of unique customers ).
Average customer lifetime, or customer average lifespan is the most complex metric to assess, since it depends on your industry and business model. If your market is a one-time niche, the CAL will be 1 to 2 years. For stores whose products are regularly updated, use three years as the basis for your calculation.
Mathematically, you improve your LTV by increasing customer value and average customer lifetime. How can you improve your retention rate? Let’s first identify the factors that extend the duration of the business relationship between the customer and the company.
What factors directly influence customer retention?
The Customer Experience: A Challenge with Multiple Benefits
Today, customers don’t just buy a product—they buy an experience (customer experience). From the ads they see to the handwritten note in the package, you need to go above and beyond to make your customers feel valued. Here are a few ideas to explore to optimize your customer retention rate.
A seamless shopping experience
Keep the path from the ad to the checkout page as simple as possible. If thepurchase process involves too many steps or is too cumbersome, customers will become discouraged and shop elsewhere, which will have an even greater impact on your conversion rate. Optimize your e-commerce site with clear buttons, informative product pages, and a well-designed user experience to make conversion easier.
Fast delivery
Set delivery times that meet—or even exceed—your customers' expectations. For example, have you ever noticed that Amazon lists a delivery date that's later than the actual delivery date?
A high-quality product
The winning combination for your online store is a great product paired with targeted and effective marketing. Enhancethe customerexperience with free content that complements their use of the product: tips, tutorials, blog posts, and more.
Reviews from Your Existing Customers
Satisfied customers are your business’sbest ambassadors! Your customers’ reviews influence a prospect’s decision and therefore play a role in your conversion rate. For your business, customer reviews provide valuable insight into the quality of your products and services.
Mentions of your brand
You don’t need aggressive advertising everywhere; publishing content without seeking immediate profit will directly boost your brand awareness. Depending on your target audience, maintain a presence on as many social media platforms as possible with exclusive, regular, and branded content. Become an integral part of your future customers’ daily lives.
From a marketing perspective, how can you leverage these factors to improve your LTV?
Now that we've looked at the various factors that affect the lifespan of your relationship with your customer, let's analyze marketing strategies to increase that customer's value.
Set up an affiliate program
Affiliate marketing strengthens your customers' appreciation for your brand and turns them into brand ambassadors. You generate additional sales without increasing your workload.
Rely on the power of word of mouth
You can offer your customer the option to share the items in their order with their friends and family. In return, they’ll receive a discount on their purchase after sharing or a store credit to use on your site.
Submit your store to affiliate networks
Affiliate platforms connect businesses with advertisers who will promote your offers. There, you’ll meet affiliate marketing professionals who will be highly effective at promoting your products and boosting your conversion rate. You’ll increase your sales with minimal effort on your part, and your CLV will improve—but this approach also promises todrive new customer acquisition.
Making the Most of Your Email List
By definition, the people who have subscribed to your list are qualified leads. They are interested in your brand. Be sure to segment your email list carefully—it will prove to be incredibly effective at generating sales.
Alternate between sales-oriented emails and those that provide value to your target audience.
Use the segments in your email list
Segment your audience into different categories to communicate effectively with the various profiles on your list. The more criteria you use, the more impactful your message will be. Choose the ones that are most relevant to your business:
- Category of products purchased;
- Average basket size range;
- Acquisition channel (SEA, SEO, social media, etc.);
- By profile (age, gender, interests).
Tailor your email sequences based on previous purchases
A purchase is an excellent opportunity to stay in touch with your customer. Take advantage of this chance to personalize their experience and generate a follow-up sale. For example, if your customer buys Product A, set up an email to be sent a few weeks later to find out what they think of it. Suggest that they enhance their experience with Product B, which complements Product A.
Don't be afraid to send emails to your customers! Automated campaigns will help you maximize your revenue and the duration of your business relationship—and thus your LTV (Customer Lifetime Value).
Prioritize subscription sales
By definition, a subscription significantly increases your customer’s value, since sales are automatically generated at regular intervals. This ensures a steady, recurring revenue stream for you and uninterrupted service for your customer. There are several types of subscriptions depending on your product and industry! These include:
- Consumables subscription;
- Premium subscription for a better experience;
- Subscription in exchange for a monthly product;
- Etc.
Grow Your VIP Club
Offer premium services or products. This marketing strategy allows you to build a genuine community around your brand, since the sense of belonging to a “tribe” is a powerful driver ofpurchases. As part of your VIP program, offer exclusive deals, exceptional products, gifts, or access to events—whether or not they’re related to your store.
Improving your LTV by optimizing costs is possible—but how?
Maximizing Customer Lifetime Value requires putting the customer back at the center of your entire strategy. We’ve just reviewed some ways to increase your customer’s value and lifetime. But all these actions come at a cost. How can you minimize these costs while increasing your CLV (Customer Lifetime Value)?
By reducing the costs of your products
Lowering your product costs allows you to offer a better price to your prospects or to create a more affordable overall offer to encourage customers to buy more units, for example. Furthermore, with lower product costs, you can also reinvest those savings into the customerexperience: better-designed packaging, a free gift with orders over X€, and so on. In practical terms, there are two solutions available to you for optimizing your sales expenses.
Renegotiate prices with your suppliers
If you have one or more suppliers you’re particularly loyal to, initiate a price negotiation. No matter where you source your supplies, a few months of loyalty or a few thousand euros in orders may be enough to renegotiate prices!
Buy in bulk to take advantage of economies of scale
Stock up and make money by taking advantage of wholesale prices. The unit cost will be lower, which will automatically increase your profit margin.
By increasing the average basket size
Lowering product prices is a start. Increasing the average order value gives you much more flexibility. Explore this opportunity to improve your LTV. How can you encourage your customers to increase their order value?
Boost Your Sales with Discounts
Promotions on your website, in your ads, or in your newsletters are sure to encourage larger purchases. For example, offer X% off onpurchases of X€ or more.
In addition to these pre-sale promotions, consider offering other products through upselling and cross-selling. An additional product—or one that complements those already in the cart—could significantly increase your average cart value… and thus your Customer Lifetime Value!
Raise your free shipping threshold
This is an effective strategy for encouraging impulse purchases and increasing your average order value. Psychologically, customers will generally find it more acceptable to buy an additional product for €20 to qualify for free shipping than to pay €6 for shipping, for example. To set this free shipping threshold, calculate your average order value before any promotions. If it’s €75, then set the free shipping threshold at €100, for example. You’ll mathematically increase your average order value and your revenue in the process.
Sell More Units with Special Offers
Consider promotions like “Buy 3, Get 1 Free”: you’ll sell more units at no extra cost (especially if you combine this idea with bulkpurchases —the benefit will be even greater).
How to Choose Your Areas for Improvement and How to Analyze Your Results
You now have a few avenues to explore to increase your CLV. But don’t forget that all these actions need to be tailored to your industry, your target audience, and many other criteria specific to each business owner! Keep track of each action you take and take the time to analyze them to assess their effectiveness.
Get the Most Out of Your Tracking Data
Tracking solutions are often underestimated, but they allow you to visualize the impact of your actions and their results on your LTV. Collecting data without cross-referencing it with other metrics means squandering significant potential for improvement. It’s not enough to simply calculate LTV to see it increase; you must identify the sources driving these changes and optimize them.
In addition to gaining a better understanding of your business and your customers' lifecycle, you'll be able to address weaknesses in your business model and identify market opportunities. Segment your email list and distribution channels as much as possible.
Gather feedback from your customers—it's invaluable! How can you use it?
To improve your CLV, you’ll obviously need to focus on the numbers. Above all, don’t overlook customer feedback. Gather customer testimonials regularly and create opportunities to engage with your target audience. By asking the right questions, you’ll uncover valuable insights for optimizing your online store…
Reach out to your customer after their very first order. That first purchase is relatively difficult and risky for them, so pamper them by asking for their feedback and reassuring them! The more successful their first experience with your online store is, the more likely they’ll be to place another order (and to tell their friends and family about you, especially if you set up a shopping cart sharing or affiliate program).
Improving Products Based on Customer Reviews
Even if you feel that your product is the best, your customer is the only one who can make the final judgment. Multiple reviews of the same products reveal a trend and help you adjust your strategy—whether by making a product from your online store the “winner” or by switching suppliers…
Stay tuned to meet your customers’ needs. This will make your catalog more relevant and have a positive impact on your LTV!
Making the shopping experience smoother through customer feedback
It’s hard to tell in real time what’s working and what isn’t. Take every opportunity to ask your prospects and customers what they like and don’t like about theirshopping experience. They may share the obstacles they face whenmaking a purchase. This will give you valuable insights into how to improve theirshopping journey.
Also consider using CRM tools to make it easier to track the most common customer feedback and the most popular promotions. You’ll be able to analyze this information by buyer profile, identify trends, and better tailor your marketing strategies for future campaigns.
Turning a Complaint into a Sales Opportunity
You must absolutely avoid leaving a complaint or claim unanswered. How can you win back a customer who is frustrated by their experience? Try to address the issue and offer a solution to make amends. Remain polite and empathetic. An appropriate response on your part can already help calm the customer down.
Once you’ve agreed on a solution, turn a complaint into an extraordinary experience for your customer. Offer them a significant discount on a product or order, even if it isn’t profitable for you. Your customer will feel valued and will take advantage of this unique opportunity to place another order and spread the word about you… in a positive way!
Conclusion: How Can You Maximize Your LTV by Leveraging Strategic Tactics?
Retention is less expensive for your business than acquisition. Maximizing LTV means optimizing every aspect of the customer experience so that customers buy more from you and continue to do so for as long as possible. To calculate LTV, we’ve identified two key strategies:
- Increase your customer'svalue through measurable marketing initiatives. The goal? To encourage your customers to place new orders and increase the value of each shopping cart.
- Extend the lifespan of your business relationship: To ensure your customers continue to buy from you for as long as possible, pamper them before and after the sale with simple, low-cost initiatives… Put the customer experience at the heart of your strategy.
Simply leveraging these factors to maximize your lifetime customer value isn’t enough. Take the time to make full use of your tracking solutions. You’ll be able to see the effects of your actions, which will allow you to refine your strategy and create even more effective marketing campaigns.
