It is self-explanatory that treating each customer like a one-night stand gives you a bad rep, limited attractiveness to new customers and ultimately significantly limits your growth potential.
If, instead, you treat your prospects and soon-to-be-acquired new customers like your future partner, and not just with the aim of getting the signature, your revenue can be expanded to a higher lifetime value per new customer.
Lifetime Value (LTV) is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer. It’s calculated as follows:
LTV = ARPA x Average lifetime customer value (ARPA is Annual Revenue Per Account)
LTV is a key metric to monitor since it gives you a clear indication of how valuable your customer is financially. This is also an important data point for your business since it helps you work on the measures that can impact your LTV and thereby the company’s profitability.
Two common examples include extending the timeframe your customers stay with you, or your ability to expand the revenue per customer during their journey with you.
And every smart marketer wants to understand this metric in order to amplify their new customer acquisition strategies to the fullest and maximize the growth potential as much as cash flow allows.
In this post I summarize 6 ways to increase LTV and 5 reasons why you will benefit.
Six Key Ways to Increase LTV
These methods of increasing your LTV can add tremendous value to your company’s bottom line. All are worth serious consideration.
1. Increasing Initial Deal Value Size
Immediately reduce the time to breakeven and immediately impact your bottom-line.
The better you understand your customer and explain the perceived value of your solution compared with the competition, the better suited you are to comfortably increase the overall pricing for your solution without diminishing your returns.
One of the most impactful ways to grow your business. Statistically speaking, upselling is 20x more effective than cross-selling and, according to Marketing Metrics, 50% more likely to be successful when compared to acquiring a new customer (besides the reduction of a typically high Cost Per Acquisition (CPA)).
Another interesting element about upselling is the “preventive churn reduction” strategic element behind the initiative. You see, a client who is planning to up their budget or retainer with you, is presumably not unsatisfied with your solution. This is why using your ability to upsell the customer as an indicator to detect potential churn can be very insightful.
Depending on your offering, this can be a very strong revenue optimization strategy, especially with B2C. In fact, it can be so powerful that Amazon once claimed up to 35% of its revenue came from cross-selling.
However, I’ve learned from personal experience that cross-selling should be done cautiously. If, for example, you’re offering a B2B subscription-based solution you need to be cautious about the value-add of your new added product offering.
If you pitch it to your client but they don’t deem it as valuable as expected, you can trigger cancellation clauses due to frustration from the client with your entire solution.
4. Boosting Referrals
For many companies this is usually an untapped goldmine waiting to be exploited, yet only 30% of B2B companies have a referral business program.
And for the B2B sector it’s extremely valuable to continuously revamp your referral marketing strategy. Especially because research shows that referrals experience a 70% higher conversion rate than regular leads! And the CPA is usually pennies on the dollar compared with regular paid sourced leads.
5. Extending Client Relationships
Arguably one of the most significant revenue optimization drivers your organization can implement and expect a strong ROI on efforts invested. In fact, a study from Bain & Company (the inventors of the Net Promoter Score) showed that increasing your customer retention rates by only 5% can yield increases in your profits by 25% to 95%.
Of course, the better you know your customer, the market, the competition and the trends, the better you can influence the emotional triggers of your prospective buyers and lead them through their search, purchase and decision making process to select your company and your solutions!
6. Implement a Vertical Market Strategy
A vertical strategy enables Increased customer lifetime value by marketing to repeated, focused customer needs.
A vertical strategy is an effective way for B2B and SaaS companies to enhance customer lifetime value. This strategy involves targeting a specific industry or niche market with specialized products or services.
By focusing on a vertical market, companies can tailor their offerings to meet the specific needs of customers in that industry, improving customer satisfaction, retention, and ultimately, increasing LTV.
Furthermore, this strategy allows companies to position themselves as experts in the industry, building trust and credibility with customers. This, in turn, can lead to recurring business and referrals, increasing LTV even further.
Additionally, the deep understanding of the customer and their needs gained from a vertical market strategy allows companies to create more targeted marketing campaigns and promotions, further reducing customer acquisition costs while increasing LTV.
5 Reasons Why You’ll Benefit from Increasing Your Lifetime Value
Here are the most compelling reasons why you should work to increase your LTV.
1. Helps Measure and Predict Growth
By knowing how much revenue each customer brings in during their lifetime, companies can project future growth and make more informed decisions on how to allocate their resources effectively.
It can help measure the effectiveness of different products or services and determine which should be invested in for optimal growth.
2. Increases Marketing ROI
Customer acquisition is costly, and to ensure that the investment in customer acquisition pays off, it is essential to understand their LTV.
By calculating and understanding LTV, companies can determine how much they can spend on acquiring each customer and create more targeted, cost-efficient marketing campaigns.
3. Improves Customer Retention
Understanding how much a customer is worth during their lifetime can help a company to set appropriate pricing, discounts, subscriptions, and loyalty programs to keep them engaged and retained for a longer period of time.
4. Encourages a Customer-Centric Approach
By assessing the long-term value of a customer, companies can focus on improving customer satisfaction and retention while providing excellent customer support to enhance the customer experience.
5. Helps With informed decision making
By understanding LTV, companies can make informed decisions about how much to invest in customer acquisition, retention, and monetization strategies. This information can be used across a range of departments, from sales to customer service, to ensure that the business is moving in the right direction.
Customer lifetime value is a key metric that every B2B and SaaS company should calculate and track. It has a significant impact on growth, return on investment, customer satisfaction, and decision-making.
By understanding the value of each customer, B2B and SaaS companies can create strategies that give them a competitive edge for achieving long-term success.