Customer Lifetime Value (sometimes referred to as CLV or CLTV) is oft discussed by startups but is frequently ignored by freelancers and small businesses. CLV is a prediction of the net profit a customer will provide your business over the course of your relationship with them.
While somewhat complex equations can be used to calculate CLV, understanding that there are actions you as freelancers or small business owners can take to increase that lifetime value is more important than the equations that guestimate CLV.
Why Should I Care About Customer Lifetime Value?
CLV is not etched in stone; it is a fluid construct than can be influenced by business decisions. You can influence CLV (the output) by changing inputs: increasing average sales per customers, improving brand loyalty (customer retention), and lowering per customer acquisition and service costs.
While all of this may seem complex, or “big-business-centric”, freelancers and small businesses can benefit just by keeping their eyes on the prize. The prize, in the end, is customer retention, which begets another prize: more profit. The longer you keep customers the better. Why? It costs more to acquire new customers than it does to keep current customers.
A joint study by Bain & Company and Harvard Business School, results of which were published in a 1990 article entitled Zero Defections: Quality Comes to Services, revealed some astonishing statistics about the value of customer retention.
Companies can boost profit by almost 100% by retaining just 5% more of their customers
— Bain & Company and Harvard Business School study
The article surmises that if businesses knew the real cost of losing a customer they would make “accurate evaluations of investments to retain customer”. The authors go on to suggest that:
Across a wide range of businesses, the pattern is the same: the longer a company keeps a customer, the more money it stands to make.
— Bain & Company and Harvard Business School study
The outcomes of that study indicate that the longer a business retains a customer, the more valuable that customer becomes, because:
- Costs to provide services is lower the longer the customer is retained.
- Retained customers are often willing to pay more for products or services from you, than purchase cheaper products and services from unknown entities.
- Loyal, long-standing customers act as no-cost marketers, talking about your business to others and referring business directly.
Customer retention then, is the key to increasing customer lifetime value. Whether or not you attempt to make a calculation of your business’s average customer lifetime value, simple awareness of the cost of losing a customer and the rewards of retaining one, may be all the incentive you need to make changes that build more enduring relationships.
Flareapps.com small business tip #077 10 Things You Can Do to Increase Customer Retention Now
While there are many tactics you can employ to increase customer loyalty and retention, remembering these 10 basics can form the backbone of your customer retention plans, regardless of the size of your business or the type of customers or industry you serve.
- Reward loyalty
When a loyal customer (one who has purchased in the past) makes buys products or services, show appreciation for that loyalty by offering a token of your appreciation. If you sell products, you might provide a small discount offer on X number of widgets purchased. If you sell services, you might provide a small discount on services re-purchased or a discount on future purchases or related services. Another way to reward customers is to make them part of an exclusive club. If a customer makes X $s worth of purchases or if they’ve been doing business with you for X number of years, they become a member of that club. You might consider providing larger discounts to these members, or host events offering free snacks and sales items exclusively to these special customers. You don’t have to “give away the store”. Even the smallest rewards are an act that will separate your business from the pack. Customers want to be appreciated and they do value a simple “Thanks”.
- Reward past loyalty
Haven’t heard from your customer for a while? It may be a sign that that relationship needs rekindling. Before that customer falls forever into the dark abyss we call “past customers”, reconnect and offer something for their past loyalty. Even a small gesture of gratitude for their past business may be enough to coax them back into the fold.
- Go above and beyond with customer service
Customer services is a key component of customer retention. According to the Right Now and Harris Interactive Customer Experience Impact Report (PDF), customer service is central to building brand loyalty. All other things being equal, if you provide excellent customer service customers will stay with you rather than jumping ship and swimming to the nearest competitor. The study reported that 89% of customers begin doing business with a competitor after a poor customer service experience. A good experience is so important to them that 86% of study respondents said there were willing to pay more for a better customer experience.
- Respond to customers’ needs without delay
According the Customer Experience Report, “50 of customers give a brand only 1 week to respond to a question before they stop doing business with them.” Nobody likes to be ignored. Ignoring customers screams “We don’t care about you!” Responding without delay shows that you do care. Responding to complaints or concerns will also make you a standout in your industry! The report revealed that “79% of consumers who shared complaints about poor customer service online had their complaints ignored” yet “of the 21% that did get responses to complaints, over half had positive reactions to the same company about which they were previously complaining.”
- Solicit complaints and respond appreciatively
Find out from customers (during the purchase process or shortly thereafter) whether they are happy with their experience. Solicit their feedback. If you don’t, you may never know they were displeased and that customer may just walk away never to be heard from again. The Customer Experience Impact Report showed that in instances where a consumer’s complaint was addressed, 46% of consumers were pleased and 22% posted a positive comment about the company on a social network.
- Be friendly and patient
Friendliness pays dividends. The study asked questions to determine what was important to consumers and what makes them stick with a particular brand. 77% of customers said they wanted friendly employees and customers service representatives, while 33% of respondents thought the brand’s reputation was important.
- Stay in touch
Using a mailing list to keep relationships with customers warm is another method of increasing customer retention. While email marketing can be overdone, judicious emails that offer value to customers are appreciated. It’s tempting to always be marketing, but email marketing that is “all about you” can get tired quickly and increase unsubscribe rates. Make at least some of your emails about the customer. Give away tips, share curated news and articles, provide something that can make their life better now without asking for something in return. Staying in touch by providing value is a great way to keep that relationship alive.
- Be seen as a problem solver
We’ve all known problem solvers. Those people you can count to help you find solutions to what ails you. Problem solvers become indispensable and we seek them out again and again. Being a problem solver means really knowing your customer, understanding their needs and the solutions they seek. In Robert J. Kriegel’s “How to Succeed in Business without Working So Damned Hard” the author states that software companies that make the shift from selling products to selling solutions to problems become more knowledgeable about their customers and can “spot new opportunities they previously didn’t know existed”. While you may not be a software vendor, the same principle applies to your business. To serve your customers better and increase retention, know what problems they are having and which ones your company can solve for them.
- Remember your customers!
The important study cited throughout this article revealed some very interesting things about how consumers perceive companies. 51% of consumers felt that companies are impersonal; some even getting a customer’s name wrong. Try to remember the customer’s name: make notes and keep records to help jog your memory.
- Keep a history of interaction with customers
34% of customers in the Customer Experience Report said that even with a history of interaction; companies forget the customer even when speaking to them recently. This forgetful attitude means that customers have to ask the same questions or tell their story again with each new company representative they speak with. Having a history of interaction – and more importantly…using it – goes hand in hand with providing great customer service.
Being aware of the things you can do to improve customer lifetime value is half the solution. Reward loyalty, provide great customer service, be responsive, stay in touch, and really know your customers. A little awareness and effort can go a long way to helping your business sustain relationships with its customers.
Can Flare Help My Business Retain Customers?
Flare is accounting software that lets you see the value of each of your customers. You’ll know the revenue that you earned from each customer, month by month, for the current year and past year.
You’ll be able spot purchasing peaks and valleys and make adjustments to your business strategies that improve performance and customer value. Flare accounting helps small businesses increase profit by providing valuable metrics (like customer value tracking) while at the same time helping you easily take care of business financial tasks such as creating and sending invoices and estimates, and tracking business expenses.