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Identifying customer lifetime value is one thing - but improving it over time is a challenge in itself. This guide provides advice and tips for long-term CLV improvements.
Previously, we looked at how to calculate lifetime value, and how to increase the profitability of your business by identifying and targeting higher value cohorts within your customer database. Very simply, customer lifetime value (CLV) is the average amount you expect to earn from each customer in your database (or cohort) over the course of their lifetime as a customer. This time period can be shortened to get a view of the course of a year. Here, we are going to look at some of the strategies and tactics that you can use to increase value within these cohorts.
There are two main strategic initiatives that help to drive lifetime value: Media Investment In his seminal work ‘How Brands Grow’, Byron Sharp and his team describe the positive relationship between marketing spend and growth in market share. Essentially, as you spend in excess of your current market share, (‘Excess Share of Voice’), your market share increases proportionally. This comes about in two ways - firstly, you attract customers and secondly, the customers that you acquire spend a larger share of their wallets from you - the value of each customer is increased. In this way, your marketing media spend works for you twice, providing that you are reaching the whole of the market with your messaging.
Outperforming your competitors in terms of customer satisfaction means that it is more likely that they will return to shop from you. Directly measuring the quality of customer experience can be difficult to do precisely, but measuring and benchmarking Net Promoter Score (NPS) gives you a measure of how you stack up against your competitors. Most tools that generate product reviews also have an option for an NPS question, along the line of
“On a scale of 0-10, with 10 being the highest, how likely would you be to recommend [brand / product / service] to a friend, colleague or family member?”
Customers then select their rating on the scale. Net promoter score is calculated by subtracting the percentage of Detractors (scores 0-6) from the Promoters (8-10). This gives you a number you can benchmark against past performance, and more importantly, against the market as a whole. You will need to take a view by trading territory - a ‘good’ Net Promoter Score can vary from country to country.
As with lifetime value, NPS can be segmented within your database. You will also need to conduct follow up research with customers in order to create hypotheses for improving experience. As you deploy website developments and make customer service improvements, you should see Net Promoter Score rise over time.
A long term focus on these two measures will keep CLV moving in the right direction.
There are also some more tactical approaches that can be used in increasing CLV. These fall into two buckets - increasing order frequency and increasing average order value. These can sometimes work in opposition to each other (increasing order value may mean customers buy less frequently), so it’s important to keep an eye on this as you make changes.
Product recommendations are an ideal way of deploying personalisation. You can utilise the large volume of customer data that you have, both in terms of purchase history and on-site activity, in order to create predictions about what individual customers are likely to purchase next. This can then be messaged by email or by social media. Many platforms will have this type of recommendation engine built-in or it can be integrated as a service.
Adding the option of a subscription to your existing e-commerce platform is a relatively large investment in terms of development and operations. It’s also a big commitment - whether it works well or has minimal uptake, you will need to maintain the infrastructure needed to fulfill orders to customers that have opted in. Conducting some research into whether customers want a subscription model rather than just on-demand will go some way to reducing the risk. You also need to bear in mind that these customers may actually come to your site less frequently, as they have a recurring delivery periodically arriving. This may cause your reporting of website performance to look less healthy, so be sure to account for this as part of your project set up.
Not every product is suitable for a subscription model; ideally, you are looking for products that people buy frequently and that do not need a great deal of consideration - pet food is a great example of this.
Building demand for new product launches
Customers don’t only buy because the product they are using has stopped working - they also purchase because they believe that they can have a superior model. Using your social and email marketing channels to create anticipation and desire around new products and ranges can result in customers buying earlier in the product life cycle than they might have consciously intended, increasing their frequency. A clear example of this is with mobile phones, where Apple and its competitors will release new products on an annual cycle, marketing them both to existing and potential customers alike.
Cross sell / upsell
Once a customer has decided to make a purchase, you have an opportunity to increase the amount that they spend. You can do this in two ways - if they add more products to their order (cross sell) or if they switch to buying a similar product of greater value (upsell). You can see cross sell a lot in FMCG businesses - most supermarkets have a ‘you purchased last time’ block, and companies like Amazon often have a ‘customers also purchased’ block on most pages. There are various creative ways of doing this that will work in different markets.
Upsell traditionally works through a merchandising approach of ‘Good’ - ‘Better’ - ‘Best’ that highlights the increased functionality or value of trading up to a more expensive option. This is seen clearly in car ranges. Having a clear understanding of where all your products fit in a range is key to being able to set up proper comparison and upsell functionality.
Increasing threshold for offers / free shipping
Clever use of thresholds can persuade customers to add products to their basket so that their order exceeds a certain threshold to attain an offer such as a discount or free shipping. It’s worth doing analysis of your basket types to determine the best thresholds for this type of activity - your average order value may well be skewed away from your most common order value because of the presence of a small number of products at a much higher price point, for example, a sports retailer that sells some bikes. Looking at the distribution in buckets will give you an idea of where you need to set your thresholds in order to get people to increase their spend. Performing this same analysis after a campaign will tell you how successful you have been.
Most platforms will allow you to create product bundles that allow you to offer customers improved value for increased spend. This can either be for the same products in the form of buy one get one free, or three for two, etc, or by combining products to form larger packages such as dinner settings or a complete suit.
This is a win-win situation - you are capturing a larger share of their spend and they are getting increased value.
As you go about trying to increase CLV, it’s important to balance these tactical and strategic initiatives - if the only actions you are taking are putting offers in front of customers, they will eventually become accustomed only to shopping when presented with a discount or voucher. This can be a trap that is difficult to escape from. You can monitor this by tracking the share of orders that involved a discount over time. By using broader strategic initiatives as well as the tactical ones, you can achieve short-term boosts in customer activity as well as longer-term growth.