Why is Customer Lifetime Value More Important Than Average Basket Size for Retail?

Customer Lifetime Value is a closely monitored indicator for companies looking to implement customer retention strategies. Indeed, we now know that the cost of acquiring new customers is much higher than the cost of retaining existing ones.

In this sense, Customer Lifetime Value is an extremely useful business indicator: it allows us to identify which actions can be considered to reduce customer acquisition costs, increase sales frequency, and maximize customer lifetime within the company!

Trustt guides you through calculating this valuable indicator and explains how to significantly boost your customer retention!

What is Customer Lifetime Value?

The definition of Customer Lifetime Value – often abbreviated as CLV or LTV – is simple: this term refers to the benefits a customer brings throughout their entire lifetime as a “customer” of the company. In other words, CLV is the sum of profits obtained from sales to a customer, from their first purchase with the company.

Why and How to Calculate CLV?

The CLV formula combines different data points.

Of course, this calculation allows us to know the revenue generated by each customer. But beyond this indicator, LTV helps highlight the customer retention rate as well as the customer acquisition cost (CAC), which is the amount spent to integrate the consumer into the customer portfolio.From there, the company can determine the time needed to achieve a return on investment for each customer and implement actions and strategies to reduce this duration.The LTV calculation is divided into different steps.1) Calculate Your Average Basket SizeTo know this indicator, simply divide the revenue by the number of sales.2) Calculate the Average Sales FrequencyTo obtain the average frequency, divide the number of sales by the number of customers.3) Obtain the Customer “Value”To do this, multiply the average frequency by the average basket size.4) Estimate the Average Customer LifetimeTo obtain the lifetime of customers in the company’s portfolio, apply the following formula: 1 / (1 – retention rate).5) Relate These Data Points to Calculate CLVFinal step: to obtain the Customer Lifetime Value, multiply the average basket size by the average purchase frequency, then multiply this result by the average customer lifecycle duration.ExampleLet’s say a company has a portfolio of 350 customers and generates a revenue of 500,000 euros. It has made 1500 sales over the year and records a retention rate of 70%.Its average basket size is 500,000/1500 = 333 eurosThe average purchase frequency is 1500/350 = 4.3The “customer value” is 333 x 4.3 = 1432 eurosThe average customer lifecycle duration is 1/(1-0.7) = 3.33 yearsThe Customer Lifetime Value of a customer for this company is therefore 333 x 4.3 x 3.33 = 4768.23 eurosThis means that a customer of this company brings in an average of 4768.23 euros throughout their lifetime as a customer of the company.How to Improve Your Customer Lifetime ValueLTV / CAC: What Does It Mean?Where Customer Lifetime Value really makes sense is when this indicator is divided by the customer acquisition cost. Indeed, this formula allows us to estimate the company’s potential to “survive” in the market. Its sustainability, in short.CAC encompasses all costs incurred to acquire a customer. This includes operational, commercial, and marketing costs necessary to deliver the product to prospects and make it known.The golden rule for the LTV/CAC ratio is to be greater than 3.A company with a ratio greater than or equal to 3 is considered profitable. Of course, if the company is new, it’s very likely that this ratio is not achieved and that CACs are much higher than the LTV. It is therefore important for young companies (and older ones too!) to adopt strategies to reduce these customer acquisition costs.However, simply reducing CAC is not enough. Profitability will be maximized if, in parallel, marketing and commercial actions are taken to increase LTV. While it is easier for SaaS or other subscription systems to ensure a good re-engagement rate, it is now crucial for retail companies to focus their strategies on increasing the repurchase rate!3 Tips to Improve Customer Loyalty and Extend Customer Lifetime ValueDevelop the Right ProductIt may seem obvious… But for a company’s customers to buy products again and again, these products must be unique and make a difference. In short, the goal is to design the best products on the market!If you think a good repurchase rate is reserved for consumable products or subscription services, think again! If a product has real benefits – flawless effectiveness coupled with other positive points that make it unique – then your customers are likely to buy it in multiple quantities. Even if the product is guaranteed for life, if it appeals to consumers, they will buy it again to give to their friends and family! This significantly increases the CLV of your customer portfolio…The challenge is therefore to develop the product or service that consumers really expect or even one that exceeds their expectations… Easier said than done!_blanknoreferrer noopenerTrustt is a marketing solution that allows consumer goods and service brands to obtain real insights and consumption criteria of their target audience. Thanks to quantitative data collected in campaign registration forms, the brand can know exactly how its target consumes and what their expectations are in terms of distribution, price, packaging…https://www.trustt.io/marketing-produit/developper-son-business-avec-trustt/Moreover, the detailed reviews that the Trustt tool allows brands to obtain offer a 360° feedback from consumers on the product or service offering. It therefore becomes easy to identify potential areas for improvement andto know what was liked or not in the product/service mix.Refine Your Targeting StrategyThe perfect product cannot find the success it deserves if it is addressed to the wrong target…It’s logical: you don’t sell pool kits to a couple living in a Parisian apartment! Hence the importance of precisely and strategically targeting the customer segments to whom the offer will be proposed.The problem encountered by most brands is having access to relevant data to establish their marketing personas. To support brands in their targeting strategy, Trustt provides them with a machine learning algorithm, SophIA®. This tool allows them to obtain a panel of consumers and influencers 100% compatible with the characteristics of the product or service. Indeed, by cross-referencing the data of the offer and these future brand ambassadors, SophIA® detects the profiles that match the most. These future brand fans are most likely to adopt the product or service offering, once, twice… and have the highest Customer Lifetime Value!Adopt a Customer-Centric ApproachLast but not least: to become the favorite brand of its consumers, it is necessary to take the utmost care of customer relationships and user experience. For this, there’s only one “secret sauce”: the customer-centric approach!https://www.trustt.io/etude-de-cas/etude-de-cas-mademoiselle-provence/By definition, the customer-centric strategy places customers at the center of all company decisions. This involves, among other things, various strategies that engage consumers in the brand adventure:The product co-creation (perfect for developing future bestsellers!)https://www.trustt.io/marketing-communautaire/co-creation-comment-faire/_blanknoreferrer noopenerThe building of an engaged community that elevates customers to the rank of super-contributors (sharing UGC from ambassadors on the brand’s social networks, maximizing engagement, strong storytelling in all communications…)https://www.trustt.io/marketing-communautaire/communaute-engagee-ambassadeurs-de-marque/_blanknoreferrer noopenerThe personalization of messages through segmented opt-in collection – which Trustt offers – in order to send high-value emails that convert! Sending tailored messages and offers to prospects and customers helps them in their search for information and/or commercial benefits, which promotes conversions and improves customer CLV.https://www.trustt.io/boite-a-outils-marketing-digital/se-rapprocher-de-ses-consommateurs-grace-a-la-newsletter/_blanknoreferrer noopener

From there, the company can determine the time needed to achieve a return on investment for each customer and implement actions and strategies to reduce this duration.

The LTV calculation is divided into different steps.

1) Calculate Your Average Basket Size

To know this indicator, simply divide the revenue by the number of sales.

2) Calculate the Average Sales Frequency

To obtain the average frequency, divide the number of sales by the number of customers.

3) Obtain the Customer “Value”

To do this, multiply the average frequency by the average basket size.

4) Estimate the Average Customer Lifetime

To obtain the lifetime of customers in the company’s portfolio, apply the following formula: 1 / (1 – retention rate).

5) Relate These Data Points to Calculate CLV

Final step: to obtain the Customer Lifetime Value, multiply the average basket size by the average purchase frequency, then multiply this result by the average customer lifecycle duration.

Example

Let’s say a company has a portfolio of 350 customers and generates a revenue of 500,000 euros. It has made 1500 sales over the year and records a retention rate of 70%.

• Its average basket size is 500,000/1500 = 333 euros
• The average purchase frequency is 1500/350 = 4.3
• The “customer value” is 333 x 4.3 = 1432 euros
• The average customer lifecycle duration is 1/(1-0.7) = 3.33 years
• The Customer Lifetime Value of a customer for this company is therefore 333 x 4.3 x 3.33 = 4768.23 euros

This means that a customer of this company brings in an average of 4768.23 euros throughout their lifetime as a customer of the company.

LTV / CAC: What Does It Mean?

Where Customer Lifetime Value really makes sense is when this indicator is divided by the customer acquisition cost. Indeed, this formula allows us to estimate the company’s potential to “survive” in the market. Its sustainability, in short.

CAC encompasses all costs incurred to acquire a customer. This includes operational, commercial, and marketing costs necessary to deliver the product to prospects and make it known.

The golden rule for the LTV/CAC ratio is to be greater than 3. A company with a ratio greater than or equal to 3 is considered profitable. Of course, if the company is new, it’s very likely that this ratio is not achieved and that CACs are much higher than the LTV. It is therefore important for young companies (and older ones too!) to adopt strategies to reduce these customer acquisition costs.

However, simply reducing CAC is not enough. Profitability will be maximized if, in parallel, marketing and commercial actions are taken to increase LTV. While it is easier for SaaS or other subscription systems to ensure a good re-engagement rate, it is now crucial for retail companies to focus their strategies on increasing the repurchase rate!

3 Tips to Improve Customer Loyalty and Extend Customer Lifetime Value

Develop the Right Product

It may seem obvious… But for a company’s customers to buy products again and again, these products must be unique and make a difference. In short, the goal is to design the best products on the market!

If you think a good repurchase rate is reserved for consumable products or subscription services, think again! If a product has real benefits – flawless effectiveness coupled with other positive points that make it unique – then your customers are likely to buy it in multiple quantities. Even if the product is guaranteed for life, if it appeals to consumers, they will buy it again to give to their friends and family! This significantly increases the CLV of your customer portfolio…

The challenge is therefore to develop the product or service that consumers really expect or even one that exceeds their expectations… Easier said than done!

Trustt is a marketing solution that allows consumer goods and service brands to obtain real insights and consumption criteria of their target audience. Thanks to quantitative data collected in campaign registration forms, the brand can know exactly how its target consumes and what their expectations are in terms of distribution, price, packaging…

Moreover, the detailed reviews that the Trustt tool allows brands to obtain offer a 360° feedback from consumers on the product or service offering. It therefore becomes easy to identify potential areas for improvement and to know what was liked or not in the product/service mix.

Refine Your Targeting Strategy

The perfect product cannot find the success it deserves if it is addressed to the wrong target…

It’s logical: you don’t sell pool kits to a couple living in a Parisian apartment! Hence the importance of precisely and strategically targeting the customer segments to whom the offer will be proposed.

The problem encountered by most brands is having access to relevant data to establish their marketing personas. To support brands in their targeting strategy, Trustt provides them with a machine learning algorithm, SophIA®. This tool allows them to obtain a panel of consumers and influencers 100% compatible with the characteristics of the product or service. Indeed, by cross-referencing the data of the offer and these future brand ambassadors, SophIA® detects the profiles that match the most. These future brand fans are most likely to adopt the product or service offering, once, twice… and have the highest Customer Lifetime Value!

Adopt a Customer-Centric Approach

Last but not least: to become the favorite brand of its consumers, it is necessary to take the utmost care of customer relationships and user experience. For this, there’s only one “secret sauce”: the customer-centric approach!

By definition, the customer-centric strategy places customers at the center of all company decisions. This involves, among other things, various strategies that engage consumers in the brand adventure:

• The product co-creation (perfect for developing future bestsellers!)
• The building of an engaged community that elevates customers to the rank of super-contributors (sharing UGC from ambassadors on the brand’s social networks, maximizing engagement, strong storytelling in all communications…)
• The personalization of messages through segmented opt-in collection – which Trustt offers – in order to send high-value emails that convert! Sending tailored messages and offers to prospects and customers helps them in their search for information and/or commercial benefits, which promotes conversions and improves customer CLV.