If you had to pick just one retention metric, customer lifetime value (CLV) is arguably the most important one. CLV is exactly what it sounds like: the amount of money a customer is projected to spend at your business during their lifetime.
Customer retention rates matter to all kinds of businesses. So it should come as no surprise that depending on the type of consumer website you’re running, metrics that matter to you may vary.
For most eCommerce sites, the goal is to get customers to buy your products or services. But for other consumer websites, like social media platforms, the goal may be activity and engagement within the platform.
Yet while there is certainly variance in what retention metric means the most to your business, one part is clear - practically all consumer websites care about customer acquisition, retaining customers, and developing loyal customers. No one wants to lose customers.
Why Retention Matters
Yes, it’s important to grow your customer base. But a solid retention strategy often has a far better return on investment.
In fact, for B2B companies in particular, improving customer retention can have massive impacts. B2B brands that increase retention by just 5% see profit increases anywhere from 25% to 95%.
Consequently, the goal of customer retention - or keeping existing customers loyal to your brand for as long as possible - is critical to your bottom line.
Customer Lifetime Value
If you had to pick just one retention metric, customer lifetime value is arguably the most important one.
Customer lifetime value (CLV) is exactly what it sounds like: the amount of money a customer is projected to spend at your business, during their lifetime.
Obviously, this varies by business. Big-ticket items like vehicles might tap out around $200K. Businesses that offer everyday items, like grocery stores, may have significantly higher lifetime values.
And brands that inspire intense loyalty (i.e. Starbucks vs. Dunkin) may have specific kinds of customers (coffee addicts!) whose lifetime value far outpaces that of casual customers.
CLV is such a significant metric because of the kind of insight it provides. Firstly, knowing the CLV of a particular customer (or a particular group of customers) tells you how much time to invest in building a relationship with them, and just how critical it is to retain them.
If you’re a manufacturer and you have B2B customers who spend hundreds of thousands of dollars with you, they’re obviously worth investing in retaining. But if you have a customer whose CLV is $25,000, then you wouldn’t want to sink too much time into retaining them, as it just wouldn’t be profitable.
Additionally, you can determine who your most profitable types of customers are. Perhaps the businesses that spend half-a-million per year all fall into a specific category, geographic area, or other delineators.
Customer lifetime value will also tell you what kinds of products customers with a high CLV want, and accordingly, what products have the highest profitability.
How to Calculate Customer Lifetime Value
Calculating CLV is actually somewhat simple. You’ll need to know the average value of a purchase, and then multiply that by the number of times a customer makes a purchase each year, then multiply that by the average length of a customer relationship.
So, the formula would look like: Average PurchaseX Frequency of Purchases XAverage Customer Relationship Length =Customer Lifetime Value.
For example, a thirty-something man who regularly purchases clothing from your eCommerce store might have a CLV like this:
$300 per transaction X 2 transactions per year X 7 years = $4,200
But a mom who has 3 children, and her entire family shops online at your store, could have a CLV that looks more like:
$500 per transaction X 3 transactions per year X 6 years = $9,000
Clearly, it’s more profitable to attract families than singular customers, or to at least spend a larger period of time nurturing relationships with the percentage of your customers who have families.
Increasing Customer Lifetime Value
We’ve already established that it’s easier to retain customers acquired than it is to continually grow your number of new customers.
Meaningful personalization can not only result in happy customers, but in increased sales, as customers may discover products through your personalized marketing that they otherwise would not have known about
3) Reward loyalty
Consider creating a customer loyalty program, that rewards repeat purchases. Rewards can include things like exclusive discount codes, freebies and samples, free shipping, or advanced access to sales.
4) Stay in touch
Don’t take the customer relationship for granted. Emails are one-sided forms of communication; two-way platforms like social media outlets allow customers to interact with your brand and be heard. Make your business accessible to customers when they want to reach out.
Wrapping It Up
Customer retention is critical. Attracting and retaining longterm customers who have a high customer lifetime value impacts your bottom line and results in repeat purchases, referrals, and peer-to-peer advocates.
Sarah is a nimble and creative marketing leader with 15 years of experience in a mix of agencies, B2B, and B2C enterprises. She brings a background in building and driving impactful marketing practices and processes for growing businesses. Sarah has expertise in brand, content marketing, lead generation, and marketing operations. She’s a co-author of the 2019 book on B2B eCommerce Digital Branch Secrets: eCommerce Playbook for Distributors.