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Beginners Guide To Customer Lifetime Value (LTV)

LTV is one of the areas that many business owners neglect. However, it is an important aspect to analyze when getting a complete picture of your marketing efforts and which are the most valuable. Customer lifetime value(LTV) is the most important concept in business. LTV represents the total value over the lifetime of a customer. Increasing it increases profit margins substantially.

How to Calculate LTV

Lifetime value is calculated using the following steps:

  1. Determine the average purchase price
  2. Determine the average number of purchases
  3. Multiply the number of purchases by the average purchase price to get your LTV

For example, if the average customer buys a $50 item twice every year, they are worth $100 a year. If they are a customer for three years on average, they have $300 in lifetime value.

A competing business may only get one purchase on average. That means their LTV is only $50. They may spend $40 acquiring and serving that customer. This means they would have much lower profit margins than the first example.

Strategies To Increase Customer LTV

1. Offer An Upsell at Purchase Time

Upsells are a classic strategy that increases profits. It costs a lot of time, energy, and money to land a customer. Many businesses pay hundreds or thousands in advertising dollars. Most don’t offer a higher-end product or service while the customer is buying.

The easiest time to sell something is when someone has just bought something. This is why successful restaurants always offer fries, drinks, and snacks as an extra.

These extra items cost very little to make, unlike a cheeseburger. Many restaurants use cheeseburger or other meat to attract the customer. Then, they offer high-margin products as a bonus.

This is similar in other fields like eCommerce. Offering a complimentary item along with a product has a very high conversion rate. Upsells are the quickest and easiest way to boost LTV.

2. Offer Recurring Products and Services

Another strategy is to offer repeat services. A good example is landscaping. Very few landscapers offer to mow a lawn just once. They do it on a weekly or monthly basis.

This increases the lifetime value of each customer. An old saying is the best business is repeat business.

Repeat payments give customers access to services. Most customers will use the service on occasion. This can mean that the company makes money for doing very little. Examples are gym memberships, streaming services, and web hosting.

Each month the customer stay is an extra month of profit. Combining this LTV strategy with these other four is extremely powerful.

3. Show Thanks and Gratitude

Most companies never show their customers appreciation. It doesn’t take long to write a handwritten thank-you note. Doing this is a lost art.

The act of taking a minute out of your day to do this pays off big. It is a lot harder to cancel or switch companies when one values you.

Every company likes to say they value their customers. Few back this up by actions. The simplest and most effective is to send a personal thank you note.

4. Providing Outstanding Support

Being abandoned after buying something is very common and frustrating. No one likes struggling to figure things out for themselves. There are three levels of offering great customer support.

Putting documentation in a manual and on your website makes a huge difference. It increases the perceived value of your service since there is less stress to deal with you. Offering a helpful knowledge base will help with sales and retention.

Another helpful tip is to invest in a customer support system. This is very important for complex services. Skimping on this is a terrible idea.

The few companies that offer support usually offer very low pay and training. This is frustrating when a customer wants a simple answer to their problem.

Great companies tie compensation with retention for their sales and support staff. Other companies tie customer survey reviews to compensation too. It makes it your employee’s best interest to be an expert in your offerings. They make more money when they do their job well.

Cutting corners in your support system is a huge mistake. Paying a little extra for better support staff with experience is a great investment. You can train support staff to sell extra products and services.

5. Collect Actionable Feedback

Give your customers routine surveys in exchange for gift cards. This allows you to gain insight into your customer’s perception.

Great businesses take this feedback and pivot. They revise their products and services to reduce frustration. Being known as the most responsive and hassle-free is the ultimate selling point.

Look for phrases like the following:

  • “This is frustrating.”
  • “I wish.”
  • “Why does it have to be this way?”
  • “I’m sick of.”

These common phrases show a customer is dealing with frustration or pain. Offering a solution to these issues is the essence of business. Take note of these common issues and revamp your offerings.

You can also use these as marketing points. Call these pain points out in ads or sales scripts. Use them to stand out.

Customers will appreciate working with a company that understands their needs. It will be like breathing a breath of fresh air. Consumers have too many things demanding their attention. You can be an oasis of sanity in their crazy lives.

Bonus Method – A Referral Program

Referrals are the ultimate compliment you can receive. Getting one means a customer trusts you. A referral is often the easiest sale to make.

People hang out with people who are like them. They likely have friends and family who think as they do. A recommendation from family members is more trustworthy than an advertisement.

Your profitability will expand once you turn one customer into two. Each referral doubles the lifetime value of that customer. It allows you to invest more in your marketing and retention systems. Doing it well creates a snowball effect.

It would help if you offered incentives for those who give you referrals. Some of these rewards could be free months, gift cards, or a commission. Paying a customer for sending people to you saves the expense of marketing.

Some of your customers will become proselytizers who preach your brand’s value everywhere. It would be best to create affiliate links to allow them to post links all over the internet—these links to buy your products on websites and social media. The link also tracks the sales made and gives a commission to the person who sent the traffic.

Amazon uses its affiliate program to achieve massive growth. It leverages all their other lifetime value strategies. There are thousands of blogs that send millions of people to Amazon every day. These blog owners make a nice amount of money for their trouble.