Evaluating the Lifetime Value of Loyal Customers

MX Bites / May 10, 2024

In business, loyal customers are the pride of any customer base. No matter how many customers patronize your brand, what really counts is how many customers you are able to keep and nurture for a long-term relationship. 

What defines a strong customer base is the number of loyal customers summed up, and the strength of the customer base increases as new customers are converted to loyal customers.

Loyal customers are so important that they are the key decision-making factor in business. Think about being the owner of a shoe store and getting ready to order more shoes. How many shoes you buy again depends on how many loyal customers you have on your list, not on the irregular or  new customers you are not sure about. Loyal customers are regular patrons; they have a positive influence on sales and on the business outlook in the long run. In business, the value of a loyal customer is termed the customer lifetime value (CLV). This article gives further exposition on how to estimate CLV and the importance of customer loyalty in today’s business environment. 

What is customer lifetime value?

This measures how much a customer is worth to the company in the long run. CLV helps you calculate the extent to which a customer will contribute to the company in a long-term relationship. This value for every customer is different. Customers are valued differently, and one could safely say that the value of a customer base is not only in the number of loyal customers but also in the lifetime value of each customer. The lifetime value of a customer is not evaluated based on a one-time purchase relationship but on many other factors that are expressed below:

• Frequency and value of purchases: A customer is referred to as loyal because of the repeat business he does with a company. The frequency of purchases does not provide a solid ground for calculating CLV, but the worth of each purchase does. How much a customer can invest in each patronage and how frequently it comes could be used to estimate the lifetime value of a customer. 
• Pricing: Loyal customers are not too price-sensitive. Instead, they focus on the value of the products they are getting in exchange for their money. They are willing to be one of the first few patrons of a new product and are not bothered when there is an increase in price of goods. 
• Retention rate: Customers who have been around for a long time are likely to continue sticking around. You can do a brief interview with your top customers to know how long they have noticed and followed your brand, right from their point of attraction to the point of repeat patronage. By observing the retention pattern, you can estimate their lifetime value.
• Annual spending: Loyal customers increases how much they spend on patronage as their annual income increases. They understand the value of the brand in their daily lives, so they are quick to allocate larger portions of their earnings to purchasing products. When you estimate how much a customer’s rate of purchases has increased over the years, you will be able to determine how much he is likely to invest in the relationship in the coming years.
• Brand advocacy: Loyal customers are usually enthusiastic to blow the trumpet about a brand and recommend new products to their circle. To estimate the lifetime loyalty of each customer, take note of the referrals that come from your loyal customers, the quality of the referral, and how often the referral comes. When loyal customers refer their friends, the friends are more likely to stick to the brand as a result of the influence of the loyal customers. Therefore, the value of a single loyal customer who chooses to advertise a brand is priceless in the long run. 

Why Loyal Customers and Customer Loyalty Value (CLV) matter

Why do we choose, in business, to focus on increasing the rate of customer loyalty rather than acquiring new customers? It’s simply because loyal customers give businesses a reason to exist. If you’ve been in business for years without any track record of customer loyalty, it means there are many things wrong with the business that make people want to leave quickly after each patronage. Customer loyalty validates a business. It shows that the company is so good that people can find a safe place that solves their buying problems. It also validates the efforts that go into the business. 

Not only does estimating customer loyalty value help us to know how valuable each customer is, but it also helps businesses to make better decisions about every customer and create a good customer experience to sustain the relationship.

Conclusion

Loyal customers boost a business’s profitability. They spread the word to others, bring in consistent revenue, and require less maintenance to be pleased. By estimating the value of loyalty with CLV, businesses will be able to make wise decisions that satisfy consumers and maintain revenue flow.