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Customer Lifetime Value – The Essence

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<![CDATA[Over the past decade or so, Internet Marketing and ecommerce have become all the rage, and have revolutionized the way most businesses operate. For many online business owners, especially those of small and medium enterprises, surviving the enormous competition in the digital era is no easy task. It is a continuous struggle. One can draw a massive amount of Internet traffic to his or her online shop, but only after a huge outlay of resources in the form of time, effort, and money.

Great Influx of Organic Traffic!! Don’t be too happy.

Okay, so now many customers have come upon your website, the doorstep to your online shop or business. Well, that was the easy part. The challenging part is to captivate them through the Sales Funnel and convert these organic leads to potential sales.
You need to convince these visitors of the quality of the products and services that your business offers, win their confidence, turn them into customers and ensure that they stick with your brand of business for the rest of their lives. This is the typical definition of Conversion Rate Optimization. So, a careful implementation of the Sales Funnel is essential. The website design, choice of products and services, and pricing are very significant to this process.

What is Customer Lifetime Value?

This is known by many names and corresponding abbreviations. Shortened to CLV or CLTV, it is also called Lifetime Customer Value (LCV) or Lifetime Value (LTV). A customer may buy some products or services during his or her time with the company, which can arrive at an estimate of the net earnings it hopes to achieve from such purchases made by the customer in the future. This is the CLV. Customers are the lifeblood of businesses and it makes sense to increase their number. At the same time, costs of acquiring new customers have to be kept to a minimum while maximizing the satisfaction of previous ones.

CLV is the Secret Recipe to Customer Retention and Brand Advocacy

  • It helps in formulating long-term plans for retaining loyal customers along with aiming to serve onboard short-term “spike” customers. It further helps companies measure the effectiveness of their Customer Retention plans.
  • Loyal customers serve as Brand Advocates and automatically serve as the first line of organic marketing. Through peer groups, friends and other social circuits, more customers become aware of your brand.
  • Business owners can, therefore, reduce expenditures in marketing and sales for acquiring new customers. Through testimonials, feedback, and positive reviews, companies can attract new customers without the need to explicitly pay for marketing.
  • The expenditure required of the customer service team to hold onto existing customers is also considerably reduced.
  • Companies can better understand the superset of loyal and potentially long-term customers and offer them exciting offers.
  • Identifying CLV also helps in determining cross-selling campaigns.

Don’t Underestimate the Power of Social Media

With the advent of social media and exponential rise in its popularity, business owners cannot ignore the essential role played by social platform marketing. The power of social media is literally boundless. In this day and age, if your business isn’t active on social media platforms, it is losing out on an enormous amount of opportunities and customers. The global average of social media use is about 31 percent of the population, which is an unbelievably large number. Social media is an easy and effective way to promote your services and products to a massive audience, irrespective of geography, demography, and language. And yes, the self-sustaining social media marketing is either free or very minimal compared to extensive marketing campaign budgets.
There are 240 million active monthly users on Twitter, over 1.2 billion monthly active Facebook users and over 300 million users on LinkedIn- The power of social media is unfathomable.
Social media does not just save you some millions of dollars on advertising and marketing. It guides traffic to your websites, which ultimately leads to more traffic and conversions. It helps to create a brand image of your company, which is an essential tool once your business is in autopilot mode.

Customers As Brand Advocates on Social Media: Customer Engagement

Happy customers usually prefer leaving behind ratings, feedback, and reviews, most of which are positive. Businesses can showcase these success stories on social media to influence other customers. These satisfied customers, therefore, serve as brand advocates and help boost sales.

  • It is also important for brands to respect customer feedback, especially when customers highlight certain drawbacks.
  • Addressing customer feedback and using those to improve the overall process instills a sense of “belonging” in customers.
  • Respecting customer feedback also helps in achieving customer engagement. According to statistics, customers are more likely to visit business domains which appreciate their feedback and dedicate efforts to implement changes that customers suggest.

Customer Engagement can also be implemented using the following steps:

  • Offering loyalty points that can be reimbursed for future purchases.
  • Offering discount coupons during subsequent purchases.
  • Offering special discounts when the purchase amount exceeds a certain denomination.
  • Offering free shipping and delivery when the purchase amount exceeds a certain denomination.
  • Offering referral bonuses to customers who manage to bring new customers onboard through “word-of-mouth” promotions.

How does Shopify focus on CLV?

A Canadian E-commerce company, Shopify has also lent its name to computer software used for online shops and businesses. They categorize their customers according to 3 parameters: Recency, Frequency, and Monetary Value. Recency reflects how recently a customer bought something. Frequency shows the number of times a customer made a purchase within a given time period. And monetary value  shows how much he or she has spent within that time period. Customers can thus be segmented and each group critically examined. They maintain reports that show “sales by customer name.” This will help us recognized the group of customers with the highest CLV.

How does Woocommerce focus on CLV?

Woocommerce treats visitors as either guests or customers. This makes sense, as a person who makes just one purchase over his lifetime and does not have a registered account is considered a guest. Those with registered accounts are customers. However, guests are looked upon as potential customers at Woocommerce. They have an excel-sheet kind of table which has an ‘orders’ column and a column of Lifetime value (LTV) for each user. This gives a fair idea of how much each customer spends. Compared with the ‘orders’ column, the LTV is a more reliable measure. A customer with a greater number of orders may have purchased cheaper products, but a customer with very few orders who have bought expensive goods would be more valuable to the company.
In the world of online business, loyal customers can be a game-changer. They can become your brand ambassadors if they recommend your products and services to others. They do switch over to a new vendor unless they are really dissatisfied. They not only buy more frequently, but also give feedback about the product or advice about how you can improve or what new products you should sell. You are insulated from price wars, as you do not have to worry if your competitors offer lower prices. Acquiring new customers can be more expensive than keeping existing ones satisfied.
You can be pretty sure that some customer fluctuation is going to happen. Some may remain, others may leave. This is why customer retention becomes very important. Companies have to convince customers to stay with them, not defect to competitors when they plan to make another purchase. If an organization is successful in doing that, then it is called customer retention.

Why do Companies Focus on Customer Retention?

  • This is a better and more efficient way of increasing profits when compared with new customer acquisition.
  • It is 6 to 7 times cheaper.
  • It acts as a key growth driver, since this is more sustainable.
  • It is faster, because selling to a new customer is more difficult than selling to an existing customer.
  • Simply to make sure the customer has no complaints. Keep him satisfied, happy and delighted with you after sales service.
  • It is easier to cross-sell to an existing customer.

The Relationship Between Customer Retention and CLV

Understanding Customer retention helps one understand CLV. For this, one should know the lifetime of the customer and the retention rate (RR), or  the number of customers retained from the previous year, expressed as a percentage. If you had 1,000 customers the previous year and 600 are still with you, then RR would be (600/1000)*100. The Customer Lifetime would be the reciprocal of (1- Retention Rate).  
If you know the CLV, you can also plan the retention costs, like offering freebies or discounts to loyal customers, privilege card memberships, coupons, and gifts. You can also send greetings on birthdays, anniversaries, Christmas and New Year. Even though these are costs to your company, in the long run, they help to improve the bottom line for your company. In the fiercely competitive world of ecommerce and online business, these count a lot.


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