Create (a) Lifetime (of) Value
A look at why CLV has become such a critical metric in modern business, and steps you can take to increase it.
Analogy time.
Remember the time when cab hailing companies were seen as the harbinger of death for car ownership and car companies?
The logic was simple. Why would anyone bother with the hassles that came with owning a car (from parking to maintenance to driving), when you could simply be chauffeured around on the tap of a button on your phone?
Didn’t exactly work out that way did it?
In the first near post pandemic year of 2022, Uber India registered a 7.1% increase in revenue from operations (source: ET) while the sales of passenger vehicles grew at an astounding 23%, which follows 27% expansion in 2021.
Sure, this is not exactly an apples to apples comparison, but it does give us a fair idea as to how it’ll be very difficult for any business to post breakneck growth minus a quality offering.
Anyone who has tried booking a cab outside of “regular” conditions will know why personal cars still rule the roost over cab hailing apps. Cabs not being available, drivers refusing to go where you want them to, safety concerns, hygiene issues, surge fares, overcharging… it goes on.
From the perspective of the responsibility that came with owning and driving your own car it made no sense to have one. But from the perspective of value?
Self-owned vehicles aren’t going anywhere, and car companies are laughing their way to the bank.
They have retained their customer base and people will keep buying cars, keeping the Customer Lifetime Value for the car industry really high.
Now, if we take the same concept of customer stickiness, we will notice that between two companies within the same industry, one company ends up getting a lot more value from the same number of customers that the other one.
This particular metric is widely known as Customer Lifetime Value.
The importance of CLV
Simply put:
Earning 10 dollars from one customer over a period of five years is a whole lot better than trying to earn 2 dollars each from five customers within the same time frame.
Why so?
Here’s why:
- Every time you look for a new customer, you will have to pursue at least 10 others (assuming a 10% conversion rate). The number usually will be anywhere upwards. Think of the cost involved. And the effort.
- Every time you speak with a 100 people, you will have to tailor your messaging in multiple ways (depending on the segment). Also, since marketing isn’t like STEM with precise equations to get to an answer, there will be a lot of hit-and-miss action. Again, multiplied effort. And cost.
- You spent a fair amount of resources to convince a person to buy a product in your category. The next brand they buy from will have make not even half the effort you did (as you already convinced their customers about the category. Why would you want to provide your competition with that sort of an edge?
- Suppose there’s a recession, and you simply don’t have enough money for effective marketing, wouldn’t it make sense to have existing people just keep your revenue chugging along?
- A happy customer means FOC (and the most valuable form of) marketing! If you look at ROAS numbers, you’ll find the WoM marketing (if included in the spends) to have disproportionately high returns.
Honestly, by now you should be fairly convinced that customer retention and repeat purchases are a no-brainer. (Unless you’re fly-by-night or rug-pull operator. In which case, why you’ve read this far is anyone’s guess.)
Note: It is generally accepted that a good CLV:CAC ratio is 3:1 i.e. if you are spending $100 to acquire a customer, the lifetime value of the same customer should at the very least be $300.
Next obvious step?
Let’s look at strategies to increase CLV.
How to increase CLV?
The simplest answer?
Have great business practices.
But that’s as vague an answer as it can be.
So here’s a fairly comprehensive list that should be useful for anyone looking at nurturing existing customers, and extracting repeat business from them.
Have a great product
Today, unless you’re a monopoly or a niche business with ridiculously high entry barrier (say uranium extraction & enrichment devices), your customers will invariably have category options.
If you don’t provide a great product, someone else will.
Let’s look at an example here.
Shoes.
The sport shoe segment in India is choc with entrenched players like Nike, UA, Adidas, Reebok, Asics etc.
However, there is a space slightly open in the casual wear segment within the INR 1000–6000 range (Onitsuka etc. are priced a lot higher). It’s not as packed to the gills with legacy brands as the sportswear segment is.
In came Neeman’s.
They came up with shoes that were CLEARLY communicated to be:
- Comfortable
- Environment Friendly
- Stylish
- Technologically advanced (materials used)
- Premium (advertising language / style / choice of influencers)
- Priced premium, but not expensive
And then they proceeded to deliver on what was claimed.
- The shoes were unquestionably comfortable
- Made with natural, sustainable and renewable materials (wool, recycled PET bottles, recycled tyres etc.). Worked wonders with the environmentally conscious millennial & gen-Z audience
- Looked absolutely slick & international
- Premium marketing language, minimalist product imagery, influencers like Jim Sarbh, Mandira Bedi
- Priced between the INR 1000–7000 range
And the result? They’ve been selling like hot cakes.
The brand grew 15X in 2021 in terms of revenue and customer base. and was valued at INR 100Cr+ after the latest round of funding.
It helps that the company has an extremely clear image of its target audience, who was defined by Taran Chhabra, co-founder and CEO, Neeman’s in a recent Financial Express article.
“Our typical customer is aged between 28 and 40 years and resides in metro cities, constantly on the move and prefers to travel light. They are concerned about the environment and open to trying products that are good for the planet,” [Financial Express]
With over 7.5 lakh pairs sold to over 5.5 lakh customers over the past three years, I’ll let the numbers clear any doubts you might have.
Excellence in customer service
In the process of researching for my piece on the GoI led retail platform ONDC, I went through the comments section on nearly all the videos I viewed on the topic. A habit since my early marketing days when google analytics (I believe) suggested having an open ended feedback form on every page, as the subjective feedback provided by visitors to the site would be the most genuine and useful.
Regardless. As I scrolled through the comments section, one underlying theme was comments questioning the ability of a multi-platform, government led entity to resolve customer complaints, issues, queries et. al.
(It’s pertinent to mention here that according to a PwC study 32% of customers will stop using a business if they’ve had a bad experience.)
A lot of comments therein expressed the user’s reluctance to move from Amazon India to ONDC (or any other platform for that matter) due to the formers excellence in customer service.
Now, I must mention here that this is a facet that is supported by my online shopping loving wife, who uses a spectrum on e-retail platforms, but swears by amazon for their excellence in customer service. (Although other platforms have certainly increased their share in her shopping habits, owing to the continuous fall in the quality of products listed on Amazon.)
It’s no wonder that Amazon was listed ahead of Google and Facebook in terms of brand trust according to a 2019 report by TRA research. Especially so, considering the scale. Amazon offers 168 million products to its customers and processes approximately 4000 products every minute.
It takes nothing less than stellar customer service for the customers of a brand to turn evangelists in online and offline spaces. And if your brand can achieve this, it will command customer loyalty and hence repeat purchases, increasing the CLV.
So how can you offer excellent customer service? Given there have been books written on this subject, and no solitary blog post, let alone a sub-section in one can offer a comprehensive solution. However, here are a few pointers:
- Soliciting feedback about buying experience through e-channels post purchase
- Deploying efficient CRM tools and their usage capturing all relevant customer data
- Immediate access of data captured to complaint resolution teams
- Strict compliance with TAT guidelines
- Explicit clarity on return / replacement / cancellation guidelines for each product
- Thorough training of all customer service staff on soft skills
By sticking to the long cherished value of “customer is king” you can stay ahead of all completion by commanding customer loyalty and repeat. After all, “one in the hand is better than….”
Another aspect of customer service that is neglected by a lot of businesses is the concept of offering usability content.
Usability is measure of how well a person can (or has been able to) use a product / service to achieve a specific goal that product / service was intended for.
It is but obvious that a person who finds value in the purchase, will be more likely to purchase it / subscribe to it again.
Hence it makes all the sense to handhold the customer through optimal usage of the product or service that you offer. Of the multiple omni-channel conversations that a brand must have with it’s customers is that of usability.
A brand must offer guides, blog posts, social media posts, videos, webpages and moderated community boards to help customers use and resolve issues to the products / services to the best of their abilities.
There must be regular communication sent about product upgrades, best-use case studies, “how-tos” and usage based nudges.
It is critical for any product or service to prove their usability and worthiness to the customer to command a slice of their time and share-of-wallet as it is all too easy to not only lose a potential lifetime customer to not only a competitor, but to an entirely different product category.
Creating Communities
One particular study from the University of Michigan found that customers spent 19% more if they became a member of a brand’s online community.
Surprised? I am too, but just because I feel the number should be much higher.
You don’t have to look far and wide to find a brand that has been built purely on the basis of community. Harley Davidson.
Even though the company might be going through tough times today (in part because of an overall decline in the performance motorcycle subset), the brand has seen more than half a century of success backed on community, even though it’s technology was arguably inferior to those of competitors.
Harley Davidson owes most of its wild brand success to HOGs (Harley Owners Group). HOGs have chapters across the world, in multiple cities and meet regularly for events small and big.
With patched jackets, and a distinctive rambunctious style, a large group of bikers not only promoted a spirit of belonging, but also of premium (and near free) visibility for the brand.
It obviously helped that HD as a brand is highly customisable and people would buy accessories after buying the bikes and others would follow suit, giving the brand a strong revenue stream from parts and accessories.
It is obvious that a manufacturer of, say, computer parts, will not see a Harley-esq success in forging and getting returns out of a community, but that’s not to say that there will be none at all.
On the contrary, a 19% number, as stated above, could be a normal case scenario for a lot of businesses.
Beyond the obvious increased sales numbers, what are the benefits of building an online community?
Direct communication with customers
Unless you’re a SaaS, there’s every possibility that your product / service might have been sold by a third party retailer or eCommerce platform where you so not have data and details about the customer and in case the customer needs it, they have to make extra effort to look for a way to get in touch. This is easily remedied with creation of online communities by the brands so to interact with the customers.
The communities are brand owned (preferable) or hosted on third party social media apps (suitable for most initial setups) and are used to have a two way communication that would not have been possible in the pre web2.0 era. Conversations are manageable, TATs tighter and responses more meaningful.
A win-win situation for everyone involved.
Feedback on product / service
Nothing is perfect. No brand can claim to have solved everything the offering set out to. There’s always room for improvement. That is the entire crux of not just one product, but of humanity in general.
And all improvement comes from identifying what is working wonderfully and what can be done better. Identifying those aspects can be done in three ways. One, a group of product / service development experts can sit together and brainstorm to bring up new versions of a product. Alternatively, companies can crowdsource ideas through focus groups and customer feedback mechanisms. Three? A hybrid of the two can be created whereas product improvement ideas can be singled out through constant monitoring of customer communities, and then worked upon by R&D division of your company.
Communities can not only be an invaluable tool to have when it comes to plugging existing gaps in your offering, but also to identify idea for product variants and improvements through suggestions from user communities.
Customer acquisition
As mentioned in the Harley Davidson example, brand communities can lead to acquisition through visibility. Additionally, a community can lead to acquisition when a prospective customer goes through user communities to gather first hand information about the pros and cons of an offering.
For example, a person interested in running will find an online community for marathon runners extremely useful when looking for a replacement for her worn out shoe. If satisfied with her brand experience, she might go online and look at conversations about shoe variants in brand communities. However if the community does not exist, or is not well managed, she might be exposed to conversations about other brands (in active communities fostered by them) and might just decide to give some other brand a chance.
Community support
This is one aspect which works on two fronts. It reduces customer dissatisfaction and also helps you reduce costs on complaint resolution. For example Apple Communities have been a go-to fostered by Apple Inc. to manage support communities for its software and hardware offerings.
Community support helps take self-resolution beyond user led search and adds a layer of active resolution of queries by active members of the community itself through first hand solutioning as well as pointing users to existing solutions posted elsewhere in the community. These communities are often seeded by in-house resources and then nudged to snowballing into self-sustaining, and often, thriving platforms for user interaction.
Loyalty
A great product that has an active support community is unquestionably one of the best ways to ensure brand loyalty through enhanced usability and a sense of belonging. Humans, the social animals we are, have this innate need to belong. To a tribe, to a community, to a country, to an identity.
While in primitive times, this sense of community and belonging ensured better survivability, it has become hardwired in our psyche and is as potent a motivational factor in modern times where you don’t really have to be a part of a roving group to find food, shelter, or safety.
A thriving brand community milks this aspect of our psyche and offers affiliation with a group of people with similar mindsets. This tribal aspect, when leveraged by brands through managing positive interactions between its consumers through community platforms helps build brand loyalty that transcends logic and target the psyche in an area which triggers the most amount of acquisition — emotion.
Cross selling, upselling
Last, but not the least. You have a thriving community of people who own and / or aspire to own your products. How can you leverage it to increase your RoMS? Just pitch a new product to them first. Preferential treatment. Offer bigger discounts, allow for unique benefits.
Additionally, you can pitch other useful (related) products to customers by introducing them in sub-communities. You can also, in terms of subscription based services offer special deals in order to upsell offerings with a wider / deeper suite of functionality / features.
Yes, both of these can also be done through mailer campaigns etc. but the joy of doing that in a community is that the seeding has to be done far less frequently with a much higher impact due to a conversation’s recurring nature of visibility. Plus, the added sense of legitimacy due to evangelist customer feedback (social proof) is a conversion tool with a potency that few other tools possess.
In conclusion, having a good product, combined with great customer service and a well managed community is a combination that will set you apart and ahead of all competition through envy inducing Customer Lifetime Value, while your competitors go about CAC based burns.
