Customer lifetime value (CLV) is one of the key indicators that businesses should concentrate on raising. What gives, though? If you can't get people to come back, your customer acquisition costs will eventually exceed your revenue as the cost of advertising rises. Digital businesses are recognized to benefit from loyalty programs for small businesses as well as large ones on a variety of levels, including helping them acquire more customers, keep more of those customers, and increase customer lifetime value. You want to encourage customers to spend more money and buy more frequently regardless of the type of business you run. The importance of lifetime value, how to measure it, and what loyalty programs you can implement to optimize the lifetime value of every customer are all topics we'll explore in this blog.
Customer lifetime value: What is it exactly?
The average sum of money a customer will spend with your brand over time is referred to as lifetime value. A customer's lifetime value will increase the longer they remain a customer. Customers who make regular, high-value transactions are naturally your most valued customers. It is important to take each customer's potential into account after they have made their initial purchase in order to fully grasp lifetime value.
How to calculate lifetime value
The simplest lifetime value calculation for a SaaS business is as follows:
Lifetime value = average customer lifetime × average monthly spend × % gross margin
Let's use the example of a life coach who has built a membership subscription for all of their customers, giving them complete access to their weekly exclusive conversations, meditation audio clips, and daily journal prompts. The total monthly cost of the subscription is $90. Your gross margin is 60% of each month's revenue, and the typical membership is kept active for 24 months.
Lifetime value = 24 × 90 × .60 = $1,296
What’s the significance of lifetime value?
Lifetime value is significant because it gives you a clearer idea of how much money you can anticipate from a single customer and how profitable it is to acquire new customers. After accounting for your sales and marketing costs, it plays a big role in evaluating if you can turn a profit.
Let's suppose you have an online shop where you sell your homemade face masks to demonstrate how lifetime value must be viewed differently from overall revenue.
The average loyal customer purchases an average of 2 face masks (because of course, they need to have options!) every year for 3 years (6 body masks over their lifetime).
Your gross margin on each face mask is $30.
The customer’s lifetime value is therefore: 2 × 3 × 30 = $180
When we contrast whether these 6 face masks had been sold to 6 different customers (each of whom churned after one transaction) instead of just one customer (who remained purchasing), we can clearly understand the significance of an increased lifetime value
Let's assume you do this by spending $20 on digital advertising to bring in each new customer.
6 face masks to 1 customer
Acquisition costs: $20 × 1 = 20
Revenue: 6 × $30 = $180
Profit: $180 - $20 = $160
6 face masks to 6 customers
Acquisition costs: $20 × 6 = $120
Revenue: 6 × $30 = $180
Profit: $180 – 120 = $60
As was shown, it is considerably more difficult to recover your acquisition costs and experience a rise in profit when you must pay money to acquire each new customer individually ($20 for each of the six customers).
You can guarantee that you can make a profit despite spending money to acquire them if you concentrate on growing the lifetime value of every customer. In the end, it all boils down to how expensive it is to acquire new customers. A customer's lifetime worth must exceed the cost to acquire them in order for a business model to be profitable (i.e., customer acquisition costs).
How to increase customer lifetime value
The simplest approach to increase customer lifetime value is by enticing customers to spend more money. How can you encourage customers to make larger purchases? Loyalty programs can help in this situation. Customer loyalty and lifetime value are intertwined. The customers who spend the most money over the longest period of time are your most valuable and loyal ones. You give customers a motivation to continue making purchases from your business rather than one of your competitors by putting in place an incentive-based loyalty program. Users are more likely to stick with your brand over time when they are aware that they can earn rewards, exclusive opportunities, or prizes that are not available anyplace else.
How loyalty programs boost lifetime value
In two ways loyalty programs boost a customer's lifetime value:
1.Their spending at your business will rise
2. Increase the frequency of their purchases from your business
Loyalty programs raise spending levels
Customers of all businesses are drawn to the special attractiveness of retail sales incentive programs. The numerous benefits that come with being a fellow member thrill customers. Customers enjoy the simple satisfaction of getting extras for their purchases, whether it's getting 3 cents off a gallon of gas for spending $25 on convenience store snacks or getting a complimentary lip mask after buying a lipstick. After all, 66% of customers will alter their spending habits to maximize their incentive accumulation, according to Bond Brand Loyalty. Customers that spend more money on each transaction have higher lifetime values, and loyalty program members have been shown to enhance revenue by between 12 and 18% compared to non-participants.
You can ensure that both you and the customer get the most out of every transaction by providing compelling prizes that can only be earned when a certain threshold is reached in terms of purchases. Similar to this principle, several online stores provide free shipping after a minimum of $50 has been placed in the shopping basket. Most of the time, we will include the extra item to reach $50 and get the incentive.
Or even take Bath & Body Works for example. Aside from their rich variety of body products (and of course being enveloped by the pleasant-smelling atmosphere!), they have now launched their new rewards program app, My Bath & Body Works. All members earn points with every purchase ($1 equates to 10 points), spend $100 to earn 1,000 points and redeem a free product of their choice, unlock members-only access to special events and products, and even receive an exclusive birthday gift. Furthermore, for every new rewards member, they will receive $10 off a $30 purchase. And the best part? Members no longer have to worry about carrying physical coupons as they’re all conveniently found in the wallet in the app. This much-loved store (with all of the 90s nostalgia it holds for many) has taken it up a notch, bringing in more excitement alongside their giant candle sale during the holiday season and semi-annual sale twice a year.
You can successfully encourage upselling and cross-selling by paying attention to what your customers value, whether you offer points, gift cards, discounts, or free swag. Let's revisit the prior case of the life coach. When a customer upgrades their monthly subscription, the life coach might consider giving them a complimentary journal and pen or perhaps a free private meditation session.
Keep in mind, however, that cross-selling and up-selling can refer to other milestones outside just when the customer is completing a purchase, such as:
Whenever a customer completes a particular task in your loyalty program
When the customer reaches a certain usage milestone
Recurring buying is encouraged by loyalty programs
When customers are committed to receiving rewards for more than just transactions, repeat purchases are a crucial part of raising lifetime value and earning profit. Repeat purchases are the most popular description of loyal behavior. When using loyalty programs, it's common to use loss aversion and switching costs to encourage repeat purchases.
By fostering a sense of urgency and our innate need to avoid loss, loyalty programs reduce the time between purchases. Establishing loyalty programs that provide limited possibilities for exclusive community membership, time-sensitive discounts, or time-sensitive rewards results in FOMO (fear of missing out), which prompts impulsive purchases and shortens the customer decision-making process. Customers are more likely to return today than in three months if they are offered a flash discount that ends in two hours or are at risk of losing their VIP membership.
By raising a user's switching costs, the kind of rewards you provide in a loyalty program have a big impact on driving repeat purchases. Giving customers something to lose if they decide to switch businesses will improve the likelihood that they stay with you over time, whether this entails giving up unused points, losing access to a private member community, or giving up their VIP social status. No matter what kind of program you offer, using rewards that cannot be transferred ensures that a customer will make a subsequent purchase in order to redeem them. For instance, if you give Starbucks gift cards to loyal customers as a reward, it's very likely that they would come back to your website in the future to earn more.
Programs to boost customer lifetime value
VIP programs and perks for returning customers
When you hear the term VIP, what comes to mind first? First-class seating next to a warm towel infused with lavender? Or possibly getting to meet your favorite musician backstage? Whatever the situation, VIP occupies a special place in our minds since it stands for exclusivity and is typically something that is earned and develops gradually.
One of the best initiatives for increasing customer lifetime value is a VIP program. By granting customers access to exclusive benefits with each purchase or usage milestone they reach, it encourages repeat purchases. Every time a customer makes a purchase at one of the many businesses that provide VIP programs, they receive points, and the more points they have, the more prizes and elite status they are eligible for. VIP reward tiers are especially motivating since they grant users who accomplish each goal a higher social status. According to psychology, customers will be motivated to keep this, especially if it could be taken away.
The difficulty of obtaining the top tier will raise a customer's usage and spending even if they don't succeed in doing so. You can influence customer behavior to your benefit by setting distinct milestones for each tier. For instance, you can choose whether a customer advances to the next tier when they make a certain number of transactions within a month, spend a certain amount on specific items, or refer a certain number of friends (thanks to referral programs for businesses).
Flash sales and rewards for special events
By fostering a sense of exclusivity and urgency, flash discounts are an excellent approach to promote repeat purchases. Flash sales have the potential to increase transaction sales by 35% by combining a short time window with high value. Let's imagine, for example, that you run a makeup subscription service. If someone spends $100 or more in the next 24 hours, you could give them a $20 credit, and if they upgrade to a premium monthly membership in the next week, you could give them a 25% discount. Consider segmenting your customer base to promote a limited-time deal as a "gratitude" present to devoted customers or to entice customers who haven't made a purchase in a while by introducing them to your non-sale products or services.
Customer referral programs
If your goal is to increase customer lifetime value, referral programs for small businesses and large might not be the most obvious choice for a program, but they have indirect benefits. These programs are well known for being a fantastic method to use your current customers' word-of-mouth to bring in new customers. However, referrals have the power to draw in some of your best customers. Compared to non-referred customers, referred customers spend 13.2% more and have lifetime values that are 16% greater.
Consider who your current most devoted customers are. Because they recognize the value, they spend the most with your business, which suggests that they probably have additional friends or family members who share their interest and who will have a comparable lifetime value to the customer who referred them. Referral programs come in a variety of shapes and sizes, with the most popular being a customer referral program where your current customers promote you to their friends and family by sending them a referral code. For instance, give the referring customer and their friend each a $10 store credit whenever the friend makes their first purchase. Offering rewards that are special to your brand, as was already discussed, will entice both parties to make additional purchases.
It all comes down to a customer's willingness to use your brand when shopping. The most obvious methods to do this are to directly encourage higher-value purchases and frequent transactions, but we also need to recognize how loyalty programs help brands and their customers develop an emotional bond. Customers feel a sense of belonging when they are welcomed into a loyalty program. Customers will feel more valued when you make them feel special (via methods like relevant rewards and special access), and this will naturally result in higher support and participation. And with Loyal-n-Save, it is possible to fulfill these goals.
Are you in search of customer loyalty program solutions? Loyal-n-Save is the answer you've been searching for! For businesses large and small, we offer tailored, user-friendly solutions centered on goals for businesses to help keep their customers continuing to shop with them. Our dashboard is designed specifically for marketers like yourself who want an easy way to build rewards programs quickly without any hassle, and here, you can change the rewards, tiers, and earning requirements for your own exclusive loyalty club. Ready to get started? Get in touch with one of our specialists today to set up a consultation and demo.
This article was written by Loyal-n-Save, an omni-channel customer loyalty solution for retailers looking to increase customer retention and new customer acquisition.