How to Increase Your Customer Lifetime Value

I’m an avid runner. I’ve been wearing the same brand and model of running shoes ever since I started the sport seven years ago, and I buy a new pair every three or four months. I’ve also recommended the particular model I wear to friends who require sneakers designed for stability. I wear a lot of the brand’s clothing, as well.

No one can doubt that I’m a loyal customer. I also represent a relatively high customer lifetime value (CLV) to the shoe company – not marathoner extraordinaire Shalane Flanagan high, but up there nonetheless.

What Is Customer Lifetime Value?

CLV measures the total amount of revenue a company will earn from a customer for its products or services over the duration of the business relationship. The higher the customer’s lifetime value, the greater the potential profits. CLV also informs marketing, inventory, pricing, staffing and many other decisions that can lead to business growth.

How to Calculate Customer Lifetime Value

CLV can be calculated several ways, depending on a variety of factors. A simple CLV formula for determining CLV is to multiply a customer’s average purchase amount with their average number of purchases per year, and then multiply the result with the number of years the person has been a customer:

(Average Purchase Amount x Average Number of Purchases Per Year)
x Number of Years of Business Relationship

As important as it is to acquire new customers, from a business standpoint it makes financial sense to delegate resources to increasing the lifetime value of customers who are already loyal to your brand. Of course, you could always raise the prices of your goods and services to increase average purchase value, but that may backfire, resulting in fewer purchases or a shorter relationship. Assuming your own costs haven’t changed, consider the following six ways to increase CLV instead.

Make It Easy to Be Your Customer

Imagine you’re your own customer. From initial research through purchase, online or off, what’s that journey like? What obstacles might you face along the way?

If you have an e-commerce site, start by assessing whether your website loads quickly, looks inviting and is easy to navigate on both desktop and mobile. Does the search function work properly and deliver appropriate results? Can you create or sign into your account with the same credentials you use at another frequently visited site, such as Google, Amazon, or Facebook? Does the site recognize you, perhaps greeting you by name?

Cross-selling and upselling are age-old techniques to boost sales, but technology – in the form of recommendation engines – makes it a whole lot easier to do so and in possibly a less off-putting way perceived by the customer.

It’s also imperative to eliminate any “sticky” points in the checkout process, beginning with this basic question: Is checkout simple and straightforward, with as few steps as practical? Do you have a choice of payment methods? Is there a charge for shipping, and, if so, are shipping fees waived if your purchase amount exceeds a certain threshold? Can you check out as a guest, rather than having to create an account to check out, if that’s what you prefer?  

Many of these same principles apply to brick-and-mortar shops. Is your physical space welcoming? Can you effortlessly find what you’re looking for – and discover items you hadn’t thought about purchasing beforehand? Does your point-of-sale system accept contactless payments through mobile wallets?   

As always, a friendly interaction – whether online or in person – in which you express gratitude for a customer’s business can go a long way toward better ensuring they come back again.

Give the People What They Want

In today's demand-driven, always-connected environment, customers have grown accustomed to getting what they want, when they want it. So how do you know what they want? Listen – everywhere your customers are “talking.”

That means not only monitoring your own social media platforms, but also seeking out other communities where your customers – and potential customers – congregate. Use relevant search terms, trends and hashtags to surface conversations that provide insight into what people are looking for. If you have a brick-and-mortar presence, converse with customers when they’re in your store. What do they like? What are they looking for? Keep your ears open for conversations between shoppers chatting in the aisles, too.  

You may want to consider creating a short online survey, as well. Perhaps offer survey takers the chance to win a gift card to your business in exchange for their participation. Once you’ve collected all of this data over time, analyze for trends and use it to inform ways to meaningfully improve CLV.

Create a Vibrant, Engaged Online Community

Establishing your own community  that customers and potential customers want to be part of is another way to increase CLV. Be sure to focus on the platforms your customer demographic uses most often, be it on your own website or social media platforms such as Facebook, Instagram, LinkedIn, and TikTok.

For example, posting a recipe using organic balsamic vinegar that you make and sell may get someone who has never purchased it before to buy it – or someone who buys one bottle a month to buy two. A short video posted on your blog about how your company implements sustainable practices may extend the lifetime relationship with a customer for whom environmental concerns are a top priority.

Developing and maintaining a vibrant community requires consistent updates with, ideally, targeted, personalized content.

Develop a Loyalty Program

Loyalty programs are designed to encourage future purchases by rewarding customers for shopping with you. This can be anything from a punch card at a coffee shop card that entitles customers to a free beverage after 10 purchases or expedited shipping for an annual fee. The latter is an example of a paid loyalty program, which McKinsey & Company notes can change user behavior and generate more value for customers.

Other types of incentives may also result in a customer purchasing more. According to Newsweek’s America's Best Loyalty Programs 2022, based on an independent survey of over 4,000 U.S. customers who belong to loyalty programs, the brands on its list sought new ways to make their programs stand out, including gamification and merging their programs with payment systems.

Cross-Sell and Upsell

Cross-selling and upselling are age-old techniques to boost sales, but technology – in the form of recommendation engines – makes it a whole lot easier to do so and in possibly a less off-putting way perceived by the customer.

For example, the last time I purchased running shoes online, the site presented me with a discounted offer to also buy a hydration vest. Other times I’ve been encouraged to consider a higher-end shoe. If you provide a service, consider offering premium features at meaningful points along the customer journey. In “analog” sales situations, do your salespeople know your customers and product lines well enough that suggesting new or upgraded products feels like a form of care and not pushiness?

The more products a customer purchases over time, the higher their CLV.

Consider a Subscription Model

Many products and services can be provided on a subscription basis, meaning customers pay a recurring fee to receive them on a set schedule, such as a monthly wine delivery. The benefits of a recurring revenue stream aside, “A subscription is a recurring touch point with the customer. It’s that constant reminder that people have a relationship with the brand,” author Adam Levinter told The Washington Post last year in the article “Everything’s becoming a subscription, and the pandemic is partly to blame.”

So what if the company I buy my running shoes from gave me the option to automatically receive a new pair every 120 days? I would absolutely appreciate that convenience – one less thing for me to think about. Billing would be automated, too. Some companies may even offer customers a discounted price just for signing up.

The Takeaway

It pays to know your customers’ lifetime value ­– and to devote resources to increasing that value over time. Businesses have at their avail many strategies to encourage customers to buy, buy more, and buy more frequently. The data generated by these efforts can also help companies continually improve their outreach, increase CLV, engender loyalty and ultimately increase profits.

Photo: Getty Images