How Surveys Help Increase Customer Lifetime Value

Customer Lifetime Value (CLV) is a sweeping metric that helps brands both keep track of and maintain their consumer loyalty.  This concept fortifies customer retention, which is central to keeping any business afloat.

In fact, customer retention — which provides a continuous flow of business — is more sustainable for business growth than customer acquisition, as it costs less to retain customers than to acquire new ones.

As the Harvard Business Review revealed, it costs 7 times more to acquire a new customer than it does to retain a current one. Thus, businesses should prioritize maximizing, or at least maintaining a steady upkeep of their customer retention.

So where does the Customer Lifetime Value fit into this? This article explains what the CLV is, how it helps on the consumer loyalty and customer retention fronts, along with how surveys can help increase it.

Defining Customer Lifetime Value   

As its name indicates, CLV is a statistic that measures the value of a customer in relation to a business. This metric does not merely gauge a customer’s value by their purchases; rather it measures their worth during their entire relationship with the company. 

As such, customer lifetime value presents the total monetary value a customer will bring to a business during their patronage with the business across their lifetime. 

Understanding the CLV of your customers, especially when taking their market segments into consideration, helps brands grasp which segments are most useful to their company. CLV therefore allows companies to focus and better market to their most valuable customer segments.

There are more critical reasons as to why brands should monitor their customer lifetime value, as increasing it gives rise to better financial performance.

The Importance of Monitoring and Increasing CLV 

It is crucial for businesses to regularly observe the customer lifetime value of their patrons on several accounts. First off, the CLV provides a concrete dollar amount to the worth of customers and it does so in terms of a customer’s long-term relationship with the company. 

With this intelligence, brands don’t have to guess how much in total a customer will contribute to their business. As far as customer retention is concerned, the CLV divulges whether certain customers will make repeat purchases.

Businesses can use this metric to determine how much to invest in their customer retention efforts

While certain customers (those in certain segments of a target market) will show promise with a high CLV, others will require more marketing campaigns in order to incite retention. 

It is therefore best for businesses to increase their CLV, as a high CLV indicates loyal customers, i.e., those who will continue to buy from a particular business. Alternatively, a low CLV is a marker of passive customers, those who have made one purchase and will be more difficult to retain.  

As such, this metric allows brands to develop strategies around particular customer segments and individual customers in order to foster customer retention.

Furthermore, monitoring CLV enables brands to understand how their UX and CX (customer experience) efforts have been faring. Perhaps a brand introduced a new feature to its website,  a new customer support training program or a new advertising campaign to increase customer retention. 

The CLV helps brands understand how those efforts contributed to customer value. 

How to Calculate Customer Lifetime Value

Customer lifetime value is relatively simple to calculate. However, there are two ways to approach this unit. These are known as the historic CLV and the predictive CLV. 

These calculations involve incorporating the different aspects within a customer relationship, which includes customer revenue, acquisition costs and duration. Here are their differences and calculations:

Historic CLV: 

This calculation involves looking at the sum of all the profits of a customer’s past purchases. The final amount is a number derived from existing customer data based on a previous time. 

Historic CLV is considered the simpler CLV computation, as it exclusively focuses on what a customer has spent on a business in the past. (Hence the name “historic”). Using the simple historic method is most apt in circumstances in which variables remain the same. Ex: Buying a $20 kit from the same brand for 3 years, in which case, the CLV is $60.

The formula: 

Customer revenue per year multiplied by

the length of the relationship in years minus

the total costs of acquiring/serving the customer = simple historic CLV

 

Example: Yearly revenue of Customer #1= $200

Relationship duration = 10 years

Cost of acquisition = $50

Cost to serve = $50 per year ($500 over 10 years)

Calculation:

$200 x 10 = $2,000

$2,000 – $550 = $1,450

CLV for Customer #1 = $1,450

Traditional CLV: 

Aside from the simple historic, CLV formula, there is the traditional customer lifetime value formula. This is suitable for customer revenues that don’t remain flat year after year. As such, these require adding in those additional changes in the customer relationship. That is where the traditional customer lifetime value formula becomes handy. 

Before you use the formula, you’ll need to understand some of the variables/terms that make it up. Here are the explanations behind each. 

GML: The gross margin per customer lifespan, this is the profit a business can expect to earn during the average customer lifespan (the revenue minus the costs).

R: The retention rate, which is the percentage of customers who stay with a business over a fixed period of time (instead of the ones who churn during that time).

D: The discount rate, which is a percentage that accounts for inflation. It is usually at 10%.

The formula: 

GML multiplied by

(Retention rate divided by (1+ Rate of discount – Retention rate) = traditional historic CLV

Example: A business’s GML = $1,900

Its customer retention rate = 70%

Its discount rate = 10%

Calculation:

1 + 0.70 – 0.1 = 1.6

0.70 / 1.6 = 0.4375

0.4375 x $1,900

CLV = $831.25

 

Predictive CLV: 

This allows brands to forecast how much profit a customer is going to generate for their business over the course of their relationship with the customer. This is known as the more complete method of computing the CLV.

This calculation combines customers’ behavioral patterns with their transaction history as a means to discover 2 components: the current customer value and the value will alter as time progresses.

The accuracy of this method increases as brands gather more data in regard to customer transactions and behaviors. 

Here are the explanations behind several of the variables used in this formula:

Average Gross Margin: The total sales profit a business earns after subtracting only the production costs.

Average Customer Lifespan: The average time a customer makes their first and last purchase with a company. For example, if the time between a customer’s first and last order is 100 days, then the average customer lifespan is 100.

The formula: 

((Average monthly transactions * Average order value) Average gross margin) * Average customer lifespan divided by 

Number of clients for this period = Predictive Customer lifetime value 

Example: A business’s average monthly transactions = 30

Its average order value = $35

Its average gross margin: 25%

Its average customer lifespan= 5

Number of clients during this period:100

Calculation:

((30 X $35) x 25%)x 5) / 1000

CLV= $105,000

How Surveys Help Boost Customer Lifetime Value

Conducting market research will allow you to understand your customers and your industry at a more in-depth level. Secondary research is especially helpful for discovering trends within your niche, along with the marketing tactics your competitors are using. 

However, it is primary research that grants businesses with a deep understanding of their customers. Surveys are the most optimal method for understanding the needs of your target market— this includes studying your existing customers, along with those in your customer base that haven’t patronized your business yet. 

This is because you can gather data on virtually anything through survey research. Additionally, there are numerous survey types and methods. For example, if you need to measure customer loyalty, you can do so with the Net Promoter Score Survey or with a retrospective survey.

Moreover, an online survey tool can help you conduct market segmentation, so that you’ll understand the different segments of customers that make up your target market. You’ll need to know these when measuring your customer lifetime value. 

When you constantly track the needs of your most valuable customers with surveys, you’ll understand how to serve them better, whether it be via product satisfaction, customer satisfaction, user experience (UX) or any other aspect in their customer journeys. By improving their customer experience (CX), you will, consequently, increase the CLV of your customers.

Questions to Use to in Surveys to Increase CLV

In order to improve your customer lifetime value, you’ll need to create surveys with content that is most relevant to your target market, with special regard to existing customers. After all, businesses ought to measure their CLV as a means to increase their customer retention.

The following includes pertinent questions to boost CLV. You may use them in a number of different surveys.

  1. What do you feel is missing in [niche, industry, product]?
  2. How can we better improve this product/ experience?
  3. What would you like to see in this product/ service/ experience?
  4. What is the most aggravating thing about buying [a product or service]?
  5. How can we make the purchasing process more efficient for you?
  6. On a scale of 1-10, how would you rate this company/product/service?
  7. What product features would you like to see added in the future?
  8. If the price wasn’t a factor, which of the following companies would you buy from?
  9. What would you consider a fair price range for a product/service?
  10. What would prompt you from buying from [company or product] again and again?

Other Considerations for Improving CLV

Online surveys can power a wide range of market research and marketing endeavors. To reap the maximum value out of surveys for your customer lifetime value, you ought to apply other best practices specifically aimed at increasing CLV. These include creating loyalty rewards programs, which incite customers to buy continuously to earn points that they can later apply towards some reward (a freebie or discount).

Additionally, businesses should consider revamping their customer relationship management. This concept is critical in CX, as a bad experience with a support agent will tarnish their opinions towards your business. Consider the CRM system you use, along with the training your representatives receive. If you optimize on these fronts, you’ll improve your CX, and by extension, your CLV.

Remember to pay special attention to customers with the highest CLVs. These tend to make repeatedly larger purchases. Retaining this group ought to be your first priority in terms of customer retention. 

These customers are your most profitable; keeping them content with your business will provide the strongest stream of sales. You’ll need to study their motivations, behaviors and desires, which you can easily achieve with the help of online surveys. 

Frequently asked questions

What is the Customer Lifetime Value (CLV)?

Rather than measuring a single transaction, the customer lifetime value (CLV) is a metric that defines the value of a customer throughout their entire relationship with a business.

What are the three approaches used to calculate customer lifetime value?

The three ways to calculate CLV are known as historical CLV, predictive CLV, and traditional CLV.

How is historic CLV measured?

Historic CLV is measured by calculating the total amount of money that a customer has spent with a company in the past, and then subtracting the total costs of acquiring and/or serving the customer over that period of time.

What is predictive CLV?

Predictive CLV is a method of forecasting how profitable a customer will be over the course of their relationship with the business. The value is calculated by studying behavior patterns and purchase history in order to arrive at their CLV.

How can surveys improve customer lifetime value?

Surveys can provide a better understanding of your most profitable customers. By continually tracking their needs, you can better serve and retain them, thereby improving customer lifetime value.