Prioritizing customer lifetime value (CLV), a metric calculating the total revenue a business can expect from a single customer throughout their relationship, is vital for sustainable growth. The higher the CLV, the more profitable – and valuable – a customer is to a business.
In this article, we discuss CLV in greater detail – why it’s important and what you can do to increase a customer’s lifetime value.
At a glance:
• Understanding Customer Lifetime Value (CLV)
• Why CLV Is Crucial to Profitability and Growth
• How Customer Lifetime Value Is Calculated
• What Is Customer Segmentation?
• 7 Tips on How To Increase Customer Lifetime Value With ORM
• Explore ORM Solutions To Maximize Customer Lifetime Value
Understanding Customer Lifetime Value (CLV)
Suppose you own a coffee shop. Every day, without fail, the librarian next door orders a single iced latte. A manager from the office down the street orders 12 iced lattes for her team perhaps five or six times a year.
Which customer do you think delivers more value to your business?
Let’s put it in numbers:
Librarian: 1 Iced Latte/day x $7/latte x 365 days/year = $2,555/year
Manager: 12 Iced Lattes/order * $7/latte * 6 orders/year = $504/year
The manager’s bulk order might seem substantial at the time, but the librarian’s daily iced coffee results in steady and predictable earnings that far surpass the manager’s sporadic purchases from your coffee shop.
This scenario, while simplified, demonstrates the concept of customer lifetime value (CLV). This business metric is the total revenue your business can expect to generate from a single customer throughout your relationship.
Beyond individual transactions, CLV accounts for the long-term value a customer brings to the business through repeat purchases, referrals and sustained loyalty. Determining the lifetime value of a customer is a proven way to determine whether your investment in customer retention is paying off.
Why CLV Is Crucial to Profitability and Growth
As every business owner knows, customers don’t come free. You’ve likely invested quite a significant amount of time and resources into acquiring and retaining new customers.
For instance, on average, SaaS companies spend $702 to acquire a new customer. Meanwhile, eCommerce businesses would have invested $70 into a customer by the time they check out their shopping cart.
Unfortunately, some customers end up jumping ship to their competitors before businesses can recoup their expenses, much less make a profit.
Knowing a customer’s lifetime value can help you make more informed decisions about where to allocate your resources.
For example, you wouldn’t want to spend $500 on acquiring a customer who is only expected to generate $100 in revenue.
Prioritizing customer lifetime value helps businesses see the bigger picture when it comes to their customer relationships. Instead of focusing on short-term gains or one-time transactions, CLV encourages a long-term approach where customer retention, loyalty and engagement are the key drivers of profitability.
Here’s why focusing on CLV marketing can be more effective than constantly chasing new customers:
Repeat Customers Spend More
On average, repeat customers are likely to spend more with each transaction than first-time buyers – about 67% more than new ones1. For instance, in the beauty and cosmetics niche, consumers spend an extra 30% per order after shopping with a company for six months. After six months, they spend 45% more4.
Increased Trust
Retaining customers also gives you more time and opportunities to deepen your relationships with them. You can do this by personalizing communication, delivering tailored offers and providing exceptional service. As consumer trust in your brand builds, customers are often more willing to purchase higher-value items or increase their order size.
Easier Engagement
Customers familiar with your brand require less effort to engage. They already know what to expect, which means it’s easier to maintain ongoing communication and marketing efforts don’t need to be as costly or extensive.
Greater Loyalty
Retaining customers strengthens their emotional connection to your brand. Loyal customers are not only more likely to continue purchasing from you but may also refer friends and family. They’re also more likely to post positive reviews.
Higher Conversion Rates
Since you’ve already built trust with them, repeat customers are more likely to convert than new ones. The goal of your marketing strategy for repeat customers, then, is to simply maintain momentum by continuing to provide exceptional customer experiences and implementing customer retention strategies.
Still not convinced that your focus should be on CLV and existing customers? Consider these numbers:
• The average conversion rate for repeat customers is 60% – 70%3
• Retaining an existing customer costs 16 times less than acquiring a new one1.
Let’s go back to the hypothetical scenario in the previous section. The librarian’s daily visits represent a higher CLV because they are making regular, predictable purchases over a long period. Even though the manager’s larger orders may seem significant at the moment, they occur infrequently, reducing their overall CLV.
Focusing on increasing CLV allows businesses to make the most out of the customers they already have. This approach maximizes and stabilizes revenue, reduces reliance on customer acquisition (which can be expensive) and supports sustainable growth.
However, this doesn’t mean that you should completely neglect new acquisitions. Instead, your efforts should strike a balance between nurturing brand advocates and attracting potential customers that fit your ideal customer profile. To which side the scale swings depends on your business goals, market conditions and customer behavior trends.
For instance, if your retention rates are strong and your core customer base is stable, more resources can be allocated toward acquiring new customers.
However, if your existing customers show high potential for repeat purchases and upselling, focusing on deepening those relationships can yield higher returns. Ideally, you should regularly assess customer data to inform where to direct your efforts.
How Customer Lifetime Value Is Calculated
Businesses typically use a formula to calculate lifetime customer value that factors in average purchase value, purchase frequency and customer lifespan.
- Average Purchase Value: This is calculated by dividing total revenue by the number of purchases made during a specific period. It tells you how much a customer typically spends per transaction.
- Purchase Frequency: This measures how often a customer makes a purchase. It’s calculated by dividing the total number of purchases by the number of customers. This helps determine how regularly customers engage with your business.
- Customer Lifespan: This is the estimated duration a customer stays with your business. It’s often calculated by averaging the number of years (or months) customers continue to make purchases.
(Average Purchase Value x Purchase Frequency) x Average Customer Lifespan = Customer Lifetime Value
For example, if the average purchase value is $300, the purchase frequency is five times a year and the customer lifespan is two years, the CLV would be $3000.
($300 x 5) x 2 = $1,500 = $3000
CLV is a valuable tool for businesses keen on boosting revenue, reducing customer acquisition costs and supporting retention efforts. However, since the average small- to medium-sized business has thousands, if not millions, of customers each year, calculating lifetime customer value individually is extremely time-consuming and resource-intensive.
A more efficient and equally effective strategy is customer segmentation.
What Is Customer Segmentation?
Categorizing or segmenting customers into groups based on shared characteristics, or customer segmentation, is a widely used marketing practice.
For business-to-business (B2B) companies, these segments could include:
• Industry
• Company Size
• Number of Employees
• Geographic Location
• Decision-making Unit (DMU)
For business-to-consumer (B2C) companies, common segments include:
• Age
• Gender
• Income
• Geographic Location
• Marital Status
• Psychographics (personaspanty, bespanefs, attitudes and values)
Customer segmentation aims to allow brands and marketers to better tailor their marketing strategies, products and services to their customers’ needs and goals. By doing so, they can boost customer satisfaction, strengthen retention efforts and maximize revenue potential.
Customer segmentation is a valuable tool for increasing customer lifetime value. Here’s why:
It Allows for Targeted Marketing
As mentioned above, customer segmentation empowers businesses to tailor their marketing efforts to each group. This personalization leads to better customer experiences and fosters long-term relationships, therefore increasing CLV.
It Maximizes Your Marketing Spend
With segmentation, you can get the most out of your marketing budget by targeting the most profitable, high-value segments.
It Helps You Choose the Right Channels
Different customers prefer not just specific types of messaging but also certain channels. For instance, a customer segment composed of millennials and Gen X might be better reached through Facebook and Instagram. In contrast, Gen Z customers might be more receptive to messaging when relayed through TikTok reels.
It Improves Resource Allocation
Customer segmentation helps businesses focus resources on high-value customers more likely to generate significant revenue over time.
It Boosts Retention and Upselling Power
When customers are segmented, businesses can better identify those with high potential for repeat purchases and upsell opportunities. Targeting these segments with personalized offers can improve retention rates, leading to a higher CLV.
Importantly, segmentation improves the accuracy of CLV calculations by applying averages to each group. Instead of calculating CLV individually for every customer, which is incredibly inefficient, businesses can estimate it for customer segments, which takes much less time and allows them to get actionable insights faster.
7 Tips on How To Increase Customer Lifetime Value With ORM
As discussed previously, building trust is essential for customers to want to patronize your business again and again. Maintaining a strong, positive online presence that reinforces this trust is crucial.
By using ORM approaches, such as actively managing reviews and replying to customer feedback, you can ensure that potential and existing customers view your business in the best possible light.
Once you’ve identified your customer segments, your next step is to tailor an ORM strategy that resonates with them, aligns with their preferences and meets their needs. By aligning your reputation management efforts with customer segments, you can foster deeper trust, increase engagement and encourage repeat business.
The following are some ways you can use ORM services and tools to build trust, strengthen your reputation and increase customer value:
1. Personalize Your Approach to ORM
Tailoring your ORM strategy, such as responding to reviews based on each customer segment’s behavior or preferences, creates a stronger connection with your customers.
When they see that your business takes their feedback seriously and engages with them on a personal level, they’re more likely to feel valued, which fosters long-term loyalty and repeat business – both of which are key to customer lifetime value maximization.
2. Implement Retention Marketing Strategies
“You can ask customers to join a loyalty program, provide coupons or offer incentives to make another purchase when you ask for reviews and surveys,” said Tim Clarke, Senior Reputation Manager at Thrive Local, on integrating ORM with your retention efforts.
Using ORM with retention or CLV marketing helps keep customers engaged with your brand. Asking for feedback or reviews helps improve customer satisfaction by making customers feel valued and heard.
Satisfied customers are more likely to stay loyal to your brand, spend more over time and have higher lifetime value. Meanwhile, retention programs encourage loyalty by rewarding customers for their continued patronage of your business and spotlighting the benefits of choosing you over your competitors.
3. Refine Customer Segmentation
Using data from their feedback, you can refine your customer segmentation further. By assessing reviews and survey results, you can get a better idea of your customers’ attitudes, personalities, beliefs and other factors that influence their decision to purchase from and continue patronizing your business.
This empowers you to utilize a more customer-centric approach and deliver more personalized experiences, which in turn improves retention and results in customer value maximization.
4. Generate Reviews
Many businesses simply wait and hope for their customers to leave positive reviews. However, it pays to be more proactive.
Review generation means actively encouraging customers to send reviews about your business, product or service. This can be done through various channels, from SMS reminders and emails to in-person requests.
So, how do reviews increase customer value?
Positive reviews help build trust in your brand. They convince potential customers that your business is trustworthy and your offerings are worth the cost. Over time, increased trust in your company can lead to more new customers, higher conversion rates and repeat purchases.
5. Respond to Reviews
When it comes to strengthening your reputation, responding to reviews is just as crucial as generating them. Proactively acknowledging both positive and negative feedback shows customers that you value their input, nurturing an authentic client relationship.
When responding to positive reviews, express genuine gratitude and offer a personal touch, such as thanking them for specific comments. This not only boosts customer loyalty but also subtly encourages further engagement with your business.
Negative reviews are far from a setback. They can provide opportunities to improve your brand reputation. The key is to respond appropriately.
“Respond to the review quickly with a professional and non-combative response,” Clarke said.
“This shows the customer that you care, and it will help fix the situation. It also shows other customers that your business cares about negative feedback and improving their experience.”
Simply put, addressing concerns with empathy and offering solutions can turn a dissatisfied customer into a happy, loyal one.
ORM services and tools streamline the review response process by ensuring timely, thoughtful replies that help maintain your brand’s positive image and improve customer satisfaction.
At Thrive Local, we respond according to your brand voice and guidelines to ensure a consistent and professional tone. Our responses are not automated but personalized to each review, which helps reassure your customers of your authenticity and genuine concern for their complaints.
6. Use Reviews To Upsell
Using insights from reviews to personalize responses provides subtle upselling opportunities. For instance, if a customer leaves a great review about their experience at your restaurant, you could respond with something like:
“Thank you so much for your kind words! We are so glad you liked our birria tacos. We hope you get to try our carne asada next time – it’s our best-seller!”
The personalized response above, which includes a product recommendation, helps increase purchase value and boost loyalty. By offering a thoughtful suggestion based on the customer’s preferences, you create a positive connection that encourages them to return and try something new. Interactions like this can lead to stronger customer loyalty, repeat business and a higher lifetime customer value.
7. Use Survey Management
Being able to identify customer preferences and areas for improvement is just one of the benefits of survey management. By gathering feedback at key points, such as after a purchase or service interaction, you can pinpoint what’s working and what needs adjustment. This data allows you to tailor your offerings, which helps increase customer satisfaction and fosters loyalty.
Explore ORM Solutions To Maximize Customer Lifetime Value
ORM efforts like review monitoring and response are essential to CLV marketing.
By making customers feel valued and heard, ORM builds trust in your brand. Used with CLV marketing, ORM efforts highlight your commitment to customer satisfaction and transparency, encouraging repeat purchases and continued patronage of your business.
What’s more, ORM helps showcase your brand’s authenticity, which is still a rare and valuable commodity in an age where overly scripted marketing efforts often make consumers skeptical of businesses and their value propositions. Human-to-human connections are greatly preferred by about 82% of U.S. consumers.
The right ORM services, like review response, allow brands to engage directly with their customers. This meets their need for human connections while building trust and loyalty, which contributes significantly to customer value maximization.
At Thrive Local, we empower businesses to improve customer retention efforts and maximize lifetime value through our full suite of ORM solutions. Our services include review response, review generation, survey management and review monitoring – essential tools for keeping a pulse on how your customers feel about your business and identifying areas for improvement.
By consistently engaging with feedback and authentically addressing customer concerns, you can foster stronger relationships, build trust and encourage repeat business. These strategies not only help retain loyal customers but also increase the likelihood of positive referrals, further extending the value of each customer relationship.
Learn more about Thrive Local and how we can help you maximize the lifetime value of your customers for sustainable growth and profitability. Contact us today for a free consultation.
Source (4):
• https://www.uschamber.com/co/grow/sales/sales-strategies-to-embrace-in-new-year
• How Trustpilot reviews help US businesses cut through the noise
• Marketing Metrics: The Definitive Guide to Measuring Marketing Performance, Paul Farris
• https://blog.smile.io/repeat-customers-profitable/
