Customer Service Glossary
What Is the Lifetime Value of a Customer?
The lifetime value of a customer is a key metric that businesses use to determine the total value of a customer throughout the length of the company-consumer relationship. Companies often use various metrics to measure profitability. However, customer lifetime value (CLV) is particularly important because it usually costs more to acquire a new customer than it does to retain an existing one.
Companies use customer lifetime value to determine which markets feature the most loyal customers and are, therefore, the most profitable. Loyal customers innately have a greater lifetime value. Still, companies can boost overall CLV by incorporating a comprehensive customer support strategy.
Customer service representatives can help consumers overcome purchasing roadblocks, offer recommendations to strengthen shopper loyalty, and assist buyers with problems post-purchase, resulting in more returning customers and reduced churn.
How Does the Lifetime Value of a Customer Impact Customer Service?
The lifetime value of a customer impacts customer support departments in several ways, including:
1. Improved Customer Loyalty
Customer support departments play a pivotal role in optimizing the lifetime value of a customer. Effective teams work to provide added value, such as new communication channels, product releases, or loyalty programs.
No matter how customer support departments add value to optimize CLV, customer satisfaction and retention rates increase. As a result, companies experience more positive reviews, a lower churn rate, and more sales.
2. Reduced Costs
Customer acquisition costs (CAC) are typically five to 25 times more expensive than customer retention costs (CRC), but increasing customer retention rates by even 5% can increase business profit by as much as 95%. Simply put, businesses make more money when they invest in existing customers.
Customer service departments can help nurture existing relationships by providing hands-on, personalized assistance, ongoing engagement, and purchasing assistance. In doing so, companies can expect to see more profit, increased CLVs, and lower CACs.
Finally, knowing the lifetime value of a customer can help companies determine how much customer support agents and sales representatives should spend on customer retention methods, such as providing personalized discount codes or discounts on certain products.
How to Calculate Customer Lifetime Value
Despite the big impact that CLV has on business decisions, the metric follows a simple formula, as follows.
Customer Value x Average Customer Lifespan = Customer Lifetime Value
That said, the formula relies on a few other calculations, including customer value, average purchase value (APV), and the typical number of purchases made by a customer.
To calculate average purpose value, companies should divide their total revenue in a single period by the number of purchases made during that same period. The average purchase frequency rate (APRF) is calculated by dividing the number of purchases made by the number of first-time customers who bought products from the business.
The next step is to multiply the average purchase price by the average purchase frequency rate to determine the customer value. Next, one divides the average number of years that a customer purchases from a business by the number of customers who have purchased products.
The final step is to multiply customer value by the average customer lifespan to determine an estimated CLV.
How to Improve Customer Lifetime Value
Companies can enhance CLV in countless ways, from loyalty programs to seamless onboarding practices. Other effective ways to boost CLV include:
1. Increasing Average Order Value
Upselling, add-ons, and cross-selling can dramatically improve CLV. To implement these tactics, companies can offer suggestions for convenient, complementary products before customers begin the checkout process.
2. Improving Customer Engagement
Customers shop to satisfy a desire or solve a problem. However, improving CLV depends on engaging customers beyond their initial purchase. With that in mind, effective practices include:
- Following up.
- Engaging in social listening.
- Providing loyalty rewards.
- Accepting and applying customer feedback.
- Hosting events for regular shoppers.
3. Streamlining Customer Support Operations
Shoppers worldwide agree: customer service can be a deciding factor when it comes to brand loyalty. With this in mind, companies should focus on streamlining their customer support departments and providing added value through personalized care, progressive refund and return policies, and omnichannel support.
Optimizing the Lifetime Value of a Customer Through Customer Service
Companies use the lifetime value of a customer to determine the effectiveness of countless operational strategies, including marketing plans and support tactics.
That said, an optimized CLV relies on a comprehensive customer service department that prioritizes customer experience and satisfaction rates. Fortunately, customer support teams can use existing CLV rates to enhance their strategies and nurture relationships with loyal customers, resulting in happier shoppers and improved lifetime values.