When considering the goal of trying to increase a customer’s lifetime value, one of the main levers is to attempt to increase loyalty/retention which will increase the length of time a customer remains a customer.
In the customer lifetime value calculation, the customer’s lifetime in years is multiplied by their annual profit. However, this assumes that the profit derived from the customer each year is the same. This is highly likely to occur and is underestimating the future value of a customer. Please note, on this website there is a customer lifetime value template that you can download for free, which builds in the ability to increase revenue over time.
So why will customer revenue increase over time?
Customer revenue is the amount of money generated, on a per customer basis, that is used to work out customer lifetime value. It is the aggregate of all sales made to the average customer, across a range of products and services offered by the firm or brand.
It is highly likely that revenue will increase over time – on a per customer basis – both because of the actions of the firm and because of the increased brand loyalty of the customer. The following is a list of reasons why customer revenue will increase over time:
Buying additional products
The customer is more likely to buy additional products from the same brand or company. This will happen due to convenience or the reassurance of the brand’s quality.
A customer dealing with a bank, for example, needing a new credit card is highly likely to obtain that product from their existing bank because it is far more convenient for them to have all their banking accounts with the one financial provider.
A customer buying a can of soup for the first time is more likely to buy a brand that they have purchased before, even if it is in another product category, because they know and trust that brand.
Reduced price sensitivity
Loyal customers are either loyal through habit or through some rational or emotional reason. Whatever the underlying driver of customer loyalty, the consumer has some degree of likeability towards the brand. Therefore, if the price increases over time, the customer is less likely (than newer customers to the brand) to switch due to price factors only.
In addition, a long-term loyal customer is less likely to be highly influenced by competitive offerings. This gives the company the opportunity to increases margins over time and therefore its profitability.
Greater tolerance for problems
If something goes wrong with the provision of the product or service – then a long-term customer is more likely to remain loyal because they can reflect on a history of purchases, rather than relying on their most recent purchase encounter.
In the longer term, some loyal customers could become advocates of the brand. This will mean that they will positively promote the brand to other consumers either directly or via social media or online forums. This allows the brand/firm to acquire new customers effectively for free – which could allow a significant saving in promotional expenditure on new customer acquisition.