Customer lifetime value (LTV) is the measure of how much money a customer has or will spend with your business.
With LTV optimization, companies try different strategies to grow LTV without impacting profitability.
Sometimes, this is easier said than done. Restaurant chain Red Lobster is reportedly considering bankruptcy due to heavy financial losses caused by several factors – one of them being a $20 endless shrimp promotion that cost the restaurant $11 million in a single quarter. They increased their customer engagement, yes, but increased their overhead costs even more.
In this guide, we will cover five LTV optimization tactics that will improve customer retention without sacrificing revenue.
What is LTV Optimization?
LTV optimization encompasses tactics that retain customers at a higher rate and encourage them to spend more on your products instead of going to your competitors.
The end goal is to ensure customer acquisition costs (CAC) are lower than LTV, resulting in a strong LTV:CAC ratio.
3 Types of LTV
Depending on your business goals, there are three different ways to calculate LTV:
| Historical LTV | Uses historical purchasing data to calculate customer value. This type of LTV helps you segment customers based on their value and use these insights to inform future marketing campaigns. |
| Predictive LTV | Uses historical purchasing data, customer trends, and other data to forecast LTV. These insights assist with financial forecasting and strategy development. |
| Residual LTV | Estimates how much a customer is going to spend on your product or service until your relationship ends. This type of LTV is helpful for SaaS companies. |
How to Calculate Customer LTV
Calculating customer LTV depends on whether you are looking at individual customers or the entirety of your customer base. It also depends on whether you calculate historical, predictive, or residual LTV.
Some companies classify LTV as the average value of all customers and use CLV to calculate the value of individual customers. Others use these acronyms interchangeably.
The simplest LTV formula is as follows:
LTV = customer value x average customer lifespan
Customer value can either refer to the value of an individual customer or the average value of all customers.
That said, some businesses use more complex calculations to determine LTV.
As an example, here is a formula Gartner suggests for software businesses:
5 Tactics to Optimize Customer LTV
Once you have made your calculations, it’s time to consider different steps towards optimizing LTV.
1. Implement a Refer-a-Friend Program
Referral marketing leverages our natural impulse to talk about the things we enjoy. When you add a great reward into the mix and make it easy to participate, you will have a highly successful referral program on your hands.
More importantly, the program will attract highly valuable customers.
A clothing retailer that launched a referral program using Extole found that a referred customer’s first purchase was nearly 2x compared to other customers. Meanwhile, a home furnishings retailer discovered that between 30% and 50% of their repeat purchasers consisted of advocates and referral recipients.
Beyond individual success stories, even large research teams have come to similar results. A landmark German study that tracked 10,000 customers of a major bank over roughly three years discovered that referral recipients were at least 16% more valuable.
When implementing a referral program, pay attention to fraud prevention. Without a way to block fraudulent referrals, the program could have the opposite effect and weaken your LTV:CAC ratio.
Mattress retailer Lull, for example, had an ineffective referral program due to coupon site abuse. The company stopped self-referrals only when they switched to Extole’s platform for their refer-a-friend program.
Lull also benefited from other types of guardrails (such as preventing cancelled orders from receiving a reward) that ensure only genuine customers use the program.
2. Personalize the User Experience
Personalization supports two key aspects of LTV optimization: retention and average order value (AOV).
Roughly 6 in 10 business leaders have seen their personalization efforts pay off, leading to an increased customer retention rate. By recommending relevant products and services, the AOV will also grow.
Consider an insurance provider offering a variety of policies.
After analyzing their customer data, the company realized that many home insurance policyholders also purchase pet insurance. So, they decided to offer a pet insurance policy to every new home insurance customer. This cross-selling strategy brings in more revenue. Plus, it creates a great customer experience by anticipating their needs.
Personalization can take many other forms, from email campaigns triggered when a user performs a specific action to using the customer’s preferred messaging channel to send important notifications.
3. Dig into Customer Analytics
Analyzing your customer data will help you understand their behavior. Then, you can apply these insights to optimize your LTV.
Digging into customer analytics allows you to answer questions such as:
- Why do customers churn?
- When are they most likely to churn?
- Why do they make a purchase?
- When is the highest chance they will make a purchase?
- Do different demographics exhibit unique behavior?
Today, companies often struggle to handle the large volumes of data streaming in from various channels. Even if they can collect it all, the data remains siloed, preventing marketers from getting a unified customer view.
Customer data platforms have emerged as an excellent solution to siloed customer data. They connect to different data sources, such as customer relationship management (CRM) software, advertising platforms, and web analytics tools. This allows you to create detailed customer profiles containing data from different touchpoints.
If you are launching a referral program, ensure your chosen platform contains sufficient analytics capabilities. Insights into your top advocates and their revenue contribution allows you to reward their dedication and amplify retention.
4. Improve Customer Support
The influence customer support wields over retention, and LTV needs little introduction.
Consider the last time you had a poor customer experience, followed by even worse support. You likely switched to a competitor and swore never to purchase from the brand again.
A simple way to boost customer support is to introduce self-service support tools. A help center or knowledge base with frequently asked questions lets customers get quick answers. And frees up the support team’s time to handle more complex issues.
Use a CRM that provides context on the customer’s previous interactions with the support team. This will prevent frustration and allow support teams to handle inquiries more efficiently.
5. Implement Annual Pricing
If you are a SaaS company struggling to retain customers for longer than 12 months, consider offering an annual plan.
According to Dan Layfield, the founder of the Subscription Index, annual pricing is popular among companies like Tinder and Blinkist with average user retention under 12 months. For proof, look no further than Spotify or Netflix. They only offer monthly plans because the average user stays for over a year.
With annual pricing, companies extend LTV by 20% to 30%, explains Layfield.
When users sign up for an annual plan, they make a larger upfront investment – usually in exchange for a discount
This gives the customer more time to use your product, develop loyalty, and invest in additional services. And because annual plans strengthen your LTV:CAC ratio, you can also afford to increase acquisition costs.
Optimize LTV with a Customer Growth Platform
Your customers are already recommending your business to people in their network. But these impromptu referrals are almost impossible to track and scale.
With a referral marketing tool, you will enable customers to invite their friends effortlessly and reach more loyal, high-spending customers.
Extole’s customer growth platform helps businesses implement refer-a-friend programs, contests, and influencer partnerships with ease. Integrated analytics capabilities let you track customer LTV and get a detailed overview of the referral program’s impact on the bottom line.
Take a quick tour of our platform to learn more.
