What is the Relationship between Customer Retention and Customer Lifetime Value?

Customer retention and customer lifetime value are integral measurements of customer loyalty. In addition, both are important metrics to measure customer experience. While retention measures the number of customers doing repeat purchases with your brand, customer lifetime value determines a customer’s worth over their lifetime. Both metrics are important to ascertain the profitability of the business.

In this article, we will establish the relationship between customer retention and customer lifetime value. 

What is Customer Lifetime Value?

Customer lifetime value (CLV) is a prediction of the total monetary value that a customer will bring to a business over their entire relationship with a brand. It is typically calculated by multiplying the average purchase value by the number of purchases per year and the average customer lifespan.

CLV = average purchase value x number of purchases per year x average customer lifespan

CLV is a valuable metric for businesses because it helps them understand the long-term value of a customer and identify customer segments that are most valuable to the business. Understanding the CLV of different customer segments can help a business make informed decisions about where to allocate resources for marketing, sales, and customer service.

For example, a company might choose to focus on retaining high CLV customers or allocate more resources to acquiring new customers with a high CLV potential. Additionally, if a company wants to expand its business, CLV can be an indicator of the customer segment to focus on.

It's also worth noting that there are different ways of estimating the CLV, depending on complexity and data availability. The most basic is historical data-based methods, but some more advanced methods like predictive modeling or machine learning algorithms can be used as well. 

To build a customer lifetime value (CLV) model, you will need to gather data on your customers' purchases, demographics, and behaviors. Then, use statistical techniques such as regression analysis to identify the factors that are most strongly associated with CLV. Once you have a model in place, you can use it to predict CLV for new or existing customers, and use that information to make decisions about marketing, sales, and customer retention. Additionally, you can also segment your customers based on their predicted CLV, and tailor your strategies to each group.

There are several tactics you can use to increase your average customer lifetime value (CLV) and generate more revenue from your existing customers. Some of these include:

✅Upselling and cross-selling: Offer related products or services to customers who have already made a purchase.

✅Loyalty programs: Reward repeat customers with discounts, exclusive offers, or other incentives to encourage them to continue doing business with you. Send targeted messages to sign up for your customer loyalty programs to get maximum benefits every time they shop.

✅Personalized marketing: Use data on your customers' past purchases and behaviors to create targeted marketing campaigns that speak to their specific interests and needs.

✅Good customer service: Make sure your customers are satisfied with their experience and address any issues promptly to keep them coming back.

✅Increase customer engagement: Send regular newsletters, run events or webinars, and engage with customers on social media to keep them interested in your business.

✅Bundle products and services: Offer package deals to customers that bundle multiple products or services together to encourage them to spend more.

✅Increase purchase frequency: Encourage customers to make more frequent purchases by offering special deals or promotions.

✅Increase order value: Encourage customers to spend more per transaction by offering discounts on larger orders, or bundle products and services.

What is Customer Retention?

Customer retention refers to the ability of a business to keep its customers over a period of time. It is typically measured as a percentage and is calculated by taking the number of customers at the end of a given period (such as a month or a year), and dividing that by the number of customers at the beginning of that period.

Customer retention rate = customers at the end of a given period/customers at the beginning of that period

Retention can be used to measure a company's performance in retaining its customers over time. It is an important metric for businesses as it is typically less expensive to retain existing customers than it is to acquire new ones. Keeping existing customers also means that a business can continue to generate revenue from them, and satisfied customers are more likely to recommend a product or service to others.

Retention rate can be used as one of the key metrics to measure a company's customer relationship and depending on the industry, the benchmark of retention rate may vary. For example, the retention rate of software-as-a-service (SaaS) companies tends to be higher than that of retail companies.

There are several tactics you can use to increase customer retention:

✅Improve customer service: Make sure your customers are satisfied with their experience and address any issues promptly.

✅Personalization: Use data on your customers' past purchases and behaviors to create targeted marketing campaigns that speak to their specific interests and needs.

✅Communicate effectively: Keep your customers informed about new products, promotions, and other important updates.

✅Make it easy to do business with you: Streamline your processes, make sure your website is user-friendly, and make it easy for customers to make purchases or get help when they need it.

✅Reward loyalty: Offer loyalty programs that reward repeat customers with discounts, exclusive offers, or other incentives.

✅Solicit feedback: Regularly ask for feedback and take customer suggestions into account when making decisions.

✅Build trust: Build trust by being transparent, following through on commitments and providing consistent, high-quality products or services.

✅Create a sense of community: Create a sense of community by creating social media groups or encourage customers to share their experience with their friends and family.

✅Segmentation and targeting: You can also segment your customers based on their behavior and tailor your customer retention strategy accordingly.

How are Customer Retention and Customer Lifetime Value Related?

Customer retention and CLV are important metrics for businesses, as they can help to identify patterns in customer behavior and inform strategies for growth.

A business that has a high retention rate is likely to also have a high CLV since retaining customers over a long period of time will result in more revenue. Conversely, a business with a low retention rate will likely have a low CLV.

Measuring and increasing customer retention rates is important as it can directly help have a positive CLV rate. In addition, customers who have a history with a brand tend to spend more, have a greater willingness to pay and are more likely to recommend a product or service to others. In fact, Research done by Harvard Business Review shows a direct correlation between customer experience and annual revenue. They found that customers who had the best experience were shown to spend 140% more than those who had a bad or less than-great experience.

Identifying customer segments with high lifetime value and focusing on retention efforts with these segments can help companies not only decrease their customer acquisition costs but also increase overall revenue.

How do Customer Retention and CLV Work Together?

Customer retention and customer lifetime value (CLV) are closely related concepts, and they work together to inform a business's growth strategy. High customer retention is generally associated with high CLV, and vice versa.

A business can use both customer retention and CLV together to identify customer segments that are most valuable to the business and allocate resources accordingly. For example, a business might choose to focus on retaining high CLV customers or allocate more resources to acquiring new customers with a high CLV potential. A business can not only increase revenue from existing customers, but also attract new high-value customers when they take both customer retention and CLV into account

Additionally, using retention and CLV together allows the business to identify trends or patterns in customer behavior and make adjustments in strategy accordingly. Improving retention among high-CLV segments would lead to a greater impact on the business bottom-line, and similarly, CLV can indicate which segments are profitable enough to spend more on retention.