Remember the story of the Golden Goose? Quick recap, then. The youngest of three brothers, Dummling (yes, as in dummy), heads out into the woods with sour beer and biscuits to cut some trees. Unlike his brothers, who hoarded their cake and wine, Dummling shares his meager snack with a strange man in the woods. As a reward for his generosity, the man has Dummling chop down the tree containing the Golden Goose.
It's an amusing folk tale that informs young listeners of the importance of generosity. But why should marketers care about the story? Dummling's small sharing should inform your business's strategy for increasing customer lifetime value.
While your competitors spend up to $377 to acquire a new customer—the proverbial wine and cake—you can spend a fraction of that nurturing existing customers to earn a golden goose of your own. Here are five strategies to increase customer value—no sour beer required.
Customer Lifetime Value Formula |
If you've never encountered the customer lifetime value formula, excel spreadsheet or otherwise, it might be helpful to get a hang of it first. Customer Lifetime Value = (Average Spend per Purchase x Frequency of Purchases x Total Number of Purchases) - (Customer Acquisition Costs + Customer Retention Costs). Businesses can increase customer lifetime value by increasing the average spending per purchase, the frequency of purchases, or extending the length of the customer relationship. They can also lift customer lifetime value by decreasing acquisition and retention costs. We'll explain more about calculating acquisition costs later. |
Maximize Each Interaction Through Upselling and Cross-selling
One way businesses can increase customer lifetime value is through an increase in customer spending on each purchase. Upselling and cross-selling are two strategies for boosting this key metric. Upselling works by encouraging customers to spend more while shopping with you.
We see upselling all the time and we hardly recognize it. Think of a coupon you saw at your grocery store offering a buy two get one free deal. You don't need two, you might not necessarily want two, but knowing you get that third one free gets you to double your spending in an instant.
Cross-selling happens at the grocery store, too. Ever been down the beer aisle and seen a conspicuous stack of red solo cups perched next to a sleeve of ping-pong balls? That's cross-selling. Businesses can put complementary products either physically next to each other or recommend them based on items already in a cart when shopping online.
Even B2B transactions can benefit from upselling and cross-selling. In that setting, it might look like offering a client a chance to try a higher, more expensive tier of service for a free trial period as an upsell. Or you can cross-sell and offer them the opportunity to bundle services for a better deal.
Done well, upselling and cross-selling can create more valuable customers. And with advances in AI, these techniques can be automated, increasing CLV even higher.
Enhance the Customer Experience
Upselling and Cross-selling are fundamental techniques, but they can only go so far. They aren't great at encouraging repeat or long-term customers. To make up for those shortcomings, you can take a look at the entire customer experience and find ways to improve it.
Take the time to experience your customer acquisition process from the outside. How would you begin looking for your business? Where are things confusing, difficult to understand, or plain painful? Is it easy to speak with someone to get more information? Is there enough information available to make a decision? What support is there after purchase, and is that communicated?
Odds are that some points along the customer journey could improve. Don't rely on just your eyes either. If your business doesn't already have survey data or customer feedback, run some to get a sense of the problems you missed along the way.
Focusing on the complete customer experience will help your business avoid dreaded churn and hold onto customers longer. Studies show that improving customer retention rates by just 5% can lead to profit increases of 25 to 95%. That's because customers are more likely to come back to simple, pain-free experiences.
Reap Rewards With a Loyalty Program
Another way to increase the frequency of purchases to drive customer lifetime value is through a customer loyalty or rewards program. In a recent survey, 79% of Americans say they purchase from a brand more frequently because they participate in a loyalty program.
It's not hard to understand why. A loyalty or rewards program offers a clear incentive for repeat and frequent purchases. When customers know they'll see a reward after a certain amount of purchases, they're more likely to make those purchases.
Loyalty and rewards programs don't have to be transactional either. Done well, they can become the launching point for an authentic community surrounding your business. Create exclusive social media spaces for loyalty members through Facebook, WhatsApp, Slack, or Telegram. Social shopping with like-minded buyers can strengthen the sense of community.
Get Personal
You can really turn up the loyalty and extend a customer's lifetime through a personal touch. Whether that's in how you cross-sell, market, or offer the rewards program, you should personalize your outreach to each customer.
Marketers understand the impact of personalization on sales. In a survey, 63% of marketers saw increased conversion rates as the primary benefit of personalization. Consumers want to know that your brand can help them solve their problems. Personalization is how you demonstrate that you can.
Understandably, you probably don't have the time to write a personal, handwritten note for each customer. But that doesn't mean you can't automate emails for birthdays or anniversaries, offer discounts on a frequently purchased product, or send them unique referral codes.
Follow Up After Every Sale
The work of extending the lifetime of customer relationships starts the second they hit the buy now button. From that moment on, your marketing, sales, and customer service teams need to proactively engage with that customer to make sure they buy again.
It starts with your confirmation message. How are you thanking your customers? If you're sending a confirmation email, consider including a discount code or coupon for the next purchase since almost everyone reads the confirmation email.
Once you've delivered your product or completed a service, are you reaching out for feedback? If not, you're risking a negative review, a lost customer, and referrals. Even if your work didn't meet expectations, proactive outreach can disrupt a negative experience and allow you to turn things around. In a recent survey, over half the respondents said that had a company reached out first, it would have kept them from changing providers.
Failure to prevent a negative review can create dire side effects. Not only is that customer lost, but their circle of influence is now less likely to buy. Data shows that family and friends are the most trusted source for product recommendations, followed by product reviews.
Customer Acquisition Cost vs. Lifetime Value
Before increasing customer lifetime value, you have to know where it currently sits. Businesses often think of lifetime value as just the customer's total spending over time. But to really grasp its value, you can put that spending in the context of your business's customer acquisition and retention costs.
Customer Acquisition Cost Formula
The customer acquisition cost is the sum of numerous variables divided by the amount of customers acquired. Marketers add marketing costs, sales costs, wages for marketing and sales members, and overhead costs together, then divide that by the number of customers acquired in a period to get the customer acquisition cost.
Customer Lifetime Value Formula
Recall the customer lifetime value formula is CLV=(Average Spend per Purchase x Frequency of Purchases x Total Number of Purchases) - (Customer Acquisition Costs + Customer Retention Costs)
To make things more concrete, consider an example of a fashion brand. Let's say a particular customer spends $40 per purchase, makes 1 purchase per month, and tends to stick around for 36 months. Their customer lifetime spending would be $40 x 1 x 36, which is $1,440. The typical customer acquisition cost is $129, and retention costs another $26, for a total of $155.
The customer lifetime value would equal $1440 (total customer spend) - $155 (customer acquisition and retention costs), which equals a $1,285 customer lifetime value.
Understanding the customer lifetime value in the context of your costs gives you a fuller picture of why investing in this metric makes sense. It shows you how to make acquisition costs worth their price tag.
Let CMG Local Solutions Help You Surge Ahead
While your competitors are busy out in the wilderness spending all their wine and cakes trying to woo new customers, you can turn a smaller budget into a golden goose with increased customer lifetime value. The only challenge? High CLV customers are just as rare as that goose.
That's why we're here. Whether you need a partner to help you boost your review star rating, someone to launch a personalized email marketing campaign, or spread the word far and wide about a new loyalty program, we can help.
Contact us today to get started.
