How to increase Customer Lifetime Value.
How to increase the Customer Lifetime Value (LTV) is a great discussion topic, since the LTV is the main profitability driver along with Customer Acquisition Cost (CAC).
Dismounting the Customer Lifetime Value
To understand how to increase Customer Lifetime Value, the most urgent thing to do is to dismount it in pieces to emerge the levers we can move to achieve our goal.
The Customer Lifetime Value can be basically decoupled into two parts.
The first is the average margin we make from a single sale. So, when a customer (new or recurring) buys from us, the average amount of money we earn from the sale. In other words, the average amount paid by a customer minus the direct costs of the sale (for example the cost of the goods we sold, the cost of the payment gateway, the logistics costs).
The second part is the average times customers buy from us. We may have customers that, once bought the first, never gets back. And customers that buy from us every month. The average behaviour in a given timeframe (e.g.: one year), is the figure we’re looking for.
Now, once dismounted, we have some actionable levers to increase the Customer Lifetime Value.
How to increase Customer Lifetime Value: increase the average margin from a single sale
So, the first lever we have to increase Customer Lifetime Value is to increase the average sales margin.
To do it, we have two ways: by increasing the average ticket or to reduce the direct costs.
Increasing the average ticket is something you may have some control on. A typical case is to offer some advantage (e.g. free shipping) in case the customer reaches a target ticket value. As well as offering an advantage to bundle the order witha complimentary service.
How to increase the average sales ticket is a huge topic, you may find some interesting thoughts about in this old-fashion but straightforward article on Entrepreneur.
Increasing the average sales margin, and hence the Customer Lifetime Value, by reducing the direct sales costs can be more challenging. Because generally it can be done especially through economies of scale. You can read a detailed analysis of mine about how economies of scale drive unit profits growth.
Got you covered with a proven method and an easy tool (a spreadsheet), free forever.
How to increase Customer Lifetime Value: build a loyal customer base
There’s no doubt that the key strategy to build any successful business is to build a loyal customer base. It is the most effective way not to just increase Customer Lifetime Value, but to increase the whole business sustainability in the long run.
That is a spread opinion around the web. To try to make it more a fact than an opinion, you can read my analysis of the cost of customer acquisition vs retention to convince yourself about it.
That said, hot to build a loyal customer base is another huge topic not covered here. There are many tactics to experiment, based on your business sector, in order to make first-time customers get back to buy again and again.
Just as food for your thoughts, be aware that the boom of subscription boxes in 2010 (approximately) was due to their promise to “simplify” the business process of having recurring customers.
As you could read, the goal of this crack was not to be the definitive guide on how to increase Customer Lifetime Value, but to make a clear and straightforward big picture.
If I reached my goal, you now have all the elements to move consciously further investigating field tactics to experiment yourself.