Capillarytech: Maximize CLV with Personalized Loyalty Guide

Impact Of Customer Loyalty On Business Growth

If there’s one thing that can be called the true heartbeat of a business – it’s its Customer. Irrespective of whether the business is an online or offline one, it cannot exist without the customers that support it. But the most brands commit the folly of spending a lot of money on acquiring new customers, but nearly not enough in retaining them.

Just how valuable is a repeat customer? A study by Bain & Company has shown that increasing customer retention numbers by as little as 5% can boost a business’ profits by 95%. Not only do repeat purchasers outperform shoppers in Average Order Values (AOV), but they especially help reduce revenue gaps; especially during bleak economic conditions and peak season sales. But how does a brand put a tangible value to a customer’s contribution to the revenue? That’s where the concept of Customer Lifetime Value (CLV) comes into the picture.

" as little as 5% can boost a business’ profits by 95% "

Understanding Customer Lifetime Value (CLV)

When the future of a business rests with a customer and his behaviour, it's imperative for a business to gauge exactly how much value a customer can bring to the table. This essentially is the core concept of Customer Lifetime Value (CLV).

CLV helps us put tangible value to the amount of money or time your customer invests on your business during the course of his/her lifetime of associating with the company.

Hypothetically, if a customer were to associate with a business for ten years, and every year for ten years, the customer spends $5000 on your company. So on paper, the Customer Lifetime Value (CLV) of that person equals $50,000.

While this sounds great on paper, we need to remember that the nature of business is changing. The way we do business is changing - the way we stock inventory, the way we perform transactions and even the way we appeal to a customer to stay with a business for a longer period of time has changed drastically. Thanks to the entry of ecommerce, companies now have access to customer behaviour more than ever.

Average Customer Lifespan

(T)
This is the amount of time that a customer spends, buying products from your company. To get this, take the average amount of money customers spend in your sector and find out how long these customers remain loyal with a certain company. The mean of these two numbers will help you figure out customer lifespan.

Average Purchase Value

(APV)
To arrive at this number, take into consideration, the value of each individual purchase a customer makes. You can arrive at this number by dividing the total revenue of the segment you’re studying by the total number of transactions that have occurred in a time period.

Average Purchase Frequency

(APF)
Average Purchase Frequency is the rate at which your customers purchase an item during a time period. You can arrive at this number by dividing the total number of purchases made by the total number of unique customers who made these purchases.

Customer Lifetime Value (CLV) = APV * APF * T

Why Is It Important To Calculate The CLV?

To put it simply – because it’s becoming more and more difficult to hold a customer’s attention. Now, no single shop, brand, or retailer has a monopoly on the customer’s attention. Especially with the entry of smartphones into the game, customer attention spans are at an all time low.

Customer retention becomes important in this situation because in a world that is cluttered with brands and their messages, the only way your brand will stand out, is if you can provide a customer experience that sets the bar really high. Retaining customers and earning their loyalty then becomes important to sustaining the health of the company in the long run.

The official term that’s used to determine the cost of bringing a new customer into the business is called CAC - it stands for Customer Acquisition Cost. If a business owner is to examine CLV and CAC in relation with each other, he will be able to understand what makes the business profitable.

In short, CAC will help you determine how much you need to spend in order to make a customer purchase from your business and the CLV will help you measure how much money a customer will bring into the business once he becomes a loyal/returning customer.

Ads and marketing are another surefire way to attract customers to your business by making them aware of what you have to offer and how you stand out from the competitors. Therefore while spending on ads and marketing is important, it’s equally important to track the amount of money spent on ads and the returns you get from it. Return On Ad Spends or ROAS is calculated using the total revenue generated by using a specific marketing channel divided by the total amount of money spent on that channel. So the formula goes

Return on Ad Spend, ROAS = Revenue / Spend

The first and the most basic thing that calculating ROAS will help you determine is if a marketing channel is performing profitably. If the business has determined it isn’t, they can always just switch to a different one or use an omni-channel strategy but ROAS is the one factor that is most basic in helping understand a business what needs to be done on the marketing front, hence guiding them on the marketing channel strategy.

Calculating ROAS will also help understand what the audience conversion process looks like to you and how much it is worth to your business to put in the effort. This way, ROAS can also be used to measure CLV.

The Role Of Personalized Loyalty Programs In Boosting CLV

So now a business has a loyal customer who returns to them to make those specific purchases. What can they do to bring in more customers and retain existing ones?

Customer loyalty programs are a great starting point for this conversation. The benefits of most customer loyalty programs are long term, so it ensures that the probability of a customer associating with you for years is higher as well.

However, the problem with many customer loyalty programs that businesses offer, is that they tend to have an outdated, one-size-fits-all approach.

This defeats the very purpose of a loyalty program. For example, if a customer finds that the reward system that the program uses is inflexible or inconvenient, with little scope to change according to a customer’s preferences, then it’s more likely that they’re not going to return. A KPMG survey found that 80% of the respondents said they prefer surprise deals or personalized gifts to information on sales, special privileges, time-saving opportunities, or other traditional program benefits.

Perhaps the biggest benefit a loyalty program offer a brand is the spike in engagement. Research has shown that the customers who actively engage with brands make 90% more frequent purchases. That’s not all, they also spend 60% per transaction and are five times more likely to choose the same brand in the future. Unfortunately, traditional loyalty programs fail to leverage the full potential of this engagement goldmine due to the generic rewards and marketing communications.

Another major advantage of a loyalty program as a marketing channel is its demographic agnosticity. Customer loyalty isn’t just limited to the baby boomers. Millennials are the target audience that most companies are after, and they’re equally likely to respond well to personalised customer loyalty programs. 90% of millennials surveyed by KPMG were a part of at least one reward program and are more likely to participate in reward programs at places like restaurants, gyms, and grocery stores. Interestingly, the same survey found that millennials are actually less likely to associate with a customer loyalty program if it comes attached to a credit card, a big box retailer or while traveling.

This study clearly hints at consumer distaste for conventional loyalty programs and a preference for personalized, experiential programs that adds true value.

How to Maximize Customer Lifetime Value with Personalized Loyalty Program