Prospective successful entrepreneurs must understand the function of customer lifetime value (CLV) in a business. CLV is like a benchmark for companies in assessing customer financial capabilities.
Learning this knowledge is very important because the business is inseparable from the customer. Businesses cannot grow, develop and progress without supportive purchasing power.
So, is measuring CLV as important as doing marketing? The answer is yes, because the two are related. With the results of CLV calculations, companies can more easily arrange promotions.
What is Customer Lifetime Value?
Before moving on to the main discussion, you must know the definition of CLV. Simply put, CLV is a prediction of the total spending that customers spend while using your product or service.
CLV can also be interpreted as projections or indicators that companies deliberately make to determine the value of a customer.
The purpose of customer lifetime value is to make it easier for companies to map the types of customers. The measurement results will group customers into specific groups.
First, is the group of customers who can provide profits to the business. The second group is the type of customers who in the future may defect to competitors.
Third, is the group of customers with a standard shopping value or less than expected. In addition, CLV also helps companies to grow their business.
Whether customers realize it or not, companies will try various ways to improve CLV. Many companies believe, the longer customers subscribe, the more loyal they will be to shop.
Table of Contents
Why Should Companies Maintain Customer Lifetime Value?
It is said that there are two surefire ways to develop a business. The first is to maintain CLV and constantly increase its value. The second way, by adding new customers.
A good customer lifetime value will help companies accurately predict customer finances. Furthermore, the CLV calculation value will also help the company in strategizing.
For more details, consider some other reasons why it is necessary to maintain the following ClV:
1. Old Customers Shop More
Customer lifetime value is a business formula or strategy that deals with old customers. Although in the process, the company also conducts comparative research between new and old customers.
From the data collected, confidence was obtained that 67% of old customers are willing to shop than new customers.
There are so many factors supporting the phenomenon. Generally, because old customers have known the advantages and disadvantages of the company’s products. So, there is no need to grope the benefits of shopping.
2. Finding New Customers Costs Big
Another reason why customer lifetime value is important for companies is the fact that getting new customers is not easy.
A lot of energy, time, thought and money that the company spends to do promotions. And the result, not necessarily as expected.
The number of new customers is still not half of the estimate. So, in order to avoid this condition, companies prefer to prioritize CLV.
CLV calculation based on the value of old customer spending is a means of learning the company to be even better. At least, the company will not make the same mistake.
3. Old Customers are More Loyal
The purchasing power of old customers is likely to be higher than that of new customers. In fact, based on research the percentage of purchasing power of old customers reaches 60-70%.
Meanwhile, the percentage of purchasing power of new customers is much smaller at between 5-20%. This condition is actually normal and often occurs in the industry.
4. Provide an Opportunity to Design for Scalability
Through CLV, companies have a greater opportunity to be able to design scalability. Why is that? Because through CLV calculations, companies can determine the value of each customer.
CLV instantly helps companies to create business plans easily and more effectively. Business losses in the future are always there, but at least they can be minimized.
5. Strengthening Business Success in Customers
A good businessman should not think narrowly and selfishly. Maybe the company has produced goods or offered high-quality services, but the role of the customer is equally valuable.
The customer lifetime value formula that the company calculates will force entrepreneurs to check all the achievements that their customers have. CLV will provide a variety of data that companies need.
Among them, customer spending data every year. CLV also allows companies to sort best seller items with items that are less salable in the market.
How to Increase Customer Lifetime Value?
Are there ways that companies can do to increase customer value? The answer is there and very much. Companies only need to choose which way is suitable and does not harm the business.
1. Promote Campaigns by Delivering Positive Content
Thanks to increasingly modern technology, companies can market products in an easier and more practical way. In order for the company’s campaign to bear fruit, create positive content.
What is positive content? Positive content is promotional content that contains information about the advantages and benefits of using the product or service.
Clearly, the company can explain to customers what are the advantages of using the product. Companies can also compare the value of the benefits of their products with those of competitors.
Of course, this promotional campaign not only aims to educate, but also encourage customers to shop. The more the number of customers who are interested, the greater the profit.
2. Ready Customer Support 24 Hours Every Day
Customer lifetime value according to today’s industry is an important study that needs to be done. But in practice, there are still many companies that have not maximized the function of CLV.
Even though how to increase the value of each customer is not that difficult. The company only needs to provide the support it needs. But in turn, many companies are still lacking in terms of service.
In fact, a quick response to questions that customers ask also shows the value of a company. Moreover, customers are now much smarter in giving judgments.
3. Interact Directly with Customers
Did you know that around 80% of customers want companies to be able to interact and respond to complaints quickly? Realize these customer expectations by creating a two-way interaction medium.
Companies simply take advantage of social media or live chat features. Turn on interactions with both old and new customers. Thus, customers feel cared for and appreciated.
4. Gather Feedback and Follow Up
Happy customers will have customer lifetime value with satisfactory value. The most effective step to make customers happy is not only by providing discounts or cash back.
Alternatively, study the feedback that customers provide. From this feedback, the company not only knows where the problem lies, but also understands the customer.
And when the feedback is coming in, immediately give a helpful response. If possible, create a new team tasked with monitoring customers.
5. Don’t hesitate to send free samples
How do I get customer lifetime value? One way is to provide free samples. Although the value and size are not large, free samples will be highly appreciated by customers.
In fact, there are many benefits of providing free samples. First, the company can promote the latest products to each customer.
Furthermore, the provision of free samples also indicates appreciation for customers. That is, the company gives appreciation to customers who spend their money at the store.
6. Continue to Improve and Improve Product Quality
Basically, increasing customer lifetime value can be done by companies in various ways, namely through improving product quality.
Quality products will make customers more loyal. Conversely, products whose quality is reduced will be increasingly abandoned by customers.
Over time, the best quality products that the company has will increase the value of goods. For example, you can find it in various luxury brands in the international market.
Luxury brands can create high-quality products that are exorbitantly priced. Is there a buyer? Of course there are and generally come from the upper class.
How to Calculate Customer Lifetime Value
Are you sure you want to use CLV to improve your company’s performance? Before practicing in the field, first understand the CLV calculation formula below:
CLV = Average customer value x customer lifetime value
That’s how to easily calculate CLV. After knowing the formula, continue to study examples of applying the formula in the available case studies.
1. The First Example of Calculating CLV
For example, a company has a customer with a customer value or transaction of USD 500 per month. The customer is proven to have subscribed for a period of 1 year.
What is the customer lifetime value of the customer?
Calculate the CLV magnitude by using the formula above. Then it only needs to be multiplied. The transaction value is multiplied by the subscription period.
As a result, USD 500 x 12 = USD 6,000.
This indicates that the CLV of the customer is worth USD 6,000. This figure may continue to increase in the future depending on customer income and also the value of purchases that increase.
2. Customer Lifetime Value Second Example
This second example question is quite deceptive so that accuracy is needed so that the results of the CLV calculation are correct.
For example, a company has an average transaction value of USD 1,000. Meanwhile, the customer is used to shopping three times in a period of 12 months. So what is the CLV?
The formula used is still the same, it’s just that the numbers that need to be entered are quite deceptive. The correct calculation is, USD 1,000 x 3 = USD 3,000.
Because in 12 months, the customer only shopped three times instead of 12 times. As a result, the customer lifetime value in this second example is USD 3,000.
Why Don’t Companies Use CLV Effectively?
Despite the advantages possessed by CLV, unfortunately there are still many companies that have not used this indicator optimally. So, what are the obstacles that make CLV not used effectively?
1. The Company Stores Data Separately
Over time, growing companies choose to store their data in a different place. This condition certainly has its own advantages and disadvantages.
The drawback is that it is difficult for companies to use customer lifetime value intensively and maximally. Why is that? Because there are more and more departments in charge of managing information.
As a result, the data obtained as a result of inter-departmental collaboration is considered inappropriate or relevant. In order to avoid such conditions, it is important for companies to manage customer data as well as possible.
Either by creating a new department that specifically works to manage customer data. Or rather by utilizing certain applications or platforms with the same function.
Namely, it functions to manage customer data. Starting from old customers to new customer data. The stored data is also complete, including customer transaction data.
2. Customers Shop from Various Devices
The next obstacle that makes the way of implementing customer lifetime value less optimal is the shopping habits of customers who use many devices.
This condition is indeed easy and practical according to customers but it will be troublesome for the company. Companies have become difficult to combine data.
3. Less Skilled Companies
This last obstacle is purely due to the lack of skills possessed by a company. The skills in question are not only in terms of science, labor, but also technology.
Therefore, it is very important for companies to improve their work ethic to be better in the future. Whenever possible, use the latest technology and hire professionals.
Thus, the use of CLV which was initially lacking began to show an increase. Companies can also be more advanced because they can take advantage of the advantages of CLV optimally.
How to Implement CLV in an E-Commerce Marketing Plan
E-Commerce is a form of buying and selling activities that take place online. The emergence of e-Commerce signifies the development of increasingly advanced technology at this time.
Just like other countries, Indonesia also practices e-Commerce. Where, the number of followers is getting more and more every day. Then, how to implement CLV in an e-Commerce promotion plan?
1. Separate Customers into Multiple Groups
The first thing a company should do is group customers into groups. For example, a company creates four groups based on customer purchasing power.
Where, the first group is specifically for customers who are willing to spend more than USD 10,000. Then, the second group with a total expenditure of USD 5,000 to less than USD 10,000.
In the third group are customers with a purchasing power of USD 1,000 to less than USD 5,000. And the last group is customers who spend less than USD 1,000.
After separating customers based on their purchasing power, proceed to plan the campaign. The campaign you create aims to increase customer purchasing power while getting new customers.
2. Focus on Marketing to Customers
The second step is much more complex considering the many kinds and ways of customer-based marketing activities. However, make sure you always campaign intelligently to the right customers.
What is meant by the right customer is a customer who is willing to involve themselves, namely shopping loyally. To make it easier, you can take advantage of various online marketing media.
First, use email to create regular campaigns and promotions. Furthermore, companies can use social media to market products or promote new products.
Furthermore, companies can also launch customer-based programs, namely loyalty programs. This program is an excellent CLV strategy and is guaranteed to attract customers.
Why is that? Through loyalty programs, the possibility of customer transaction value increases higher. Customers will no longer hesitate to shop for products because they are tempted by the benefits.
That’s interesting information about CLV. For ordinary people, CLV may be a very difficult and heavy discussion. But for entrepreneurs, understanding CLV is an important thing that is beneficial. Moreover, if customer lifetime value is utilized optimally so as to improve brand image while increasing consumer purchasing power.