The Lifetime Value of a Customer
Customer lifetime value (LTV) is the total revenue a business can expect from a single customer account throughout the business relationship. It considers the average purchase value, purchase frequency, and customer lifespan. Here's a breakdown of these elements for a shoe store:
Average Purchase Value: In our scenario, the average positive transaction is $200. Refunds of specific transactions are ignored for this analysis because they undermine the typical transaction values. My scenario imagines a store with both brand name performance athletic brands and brand name comfort lifestyle shoes for adults.
Purchase Frequency: Depending on the customer's needs and brand loyalty, purchase frequency can vary. Performance athletic shoe buyers might replace their shoes more frequently due to wear and tear, while lifestyle comfort shoe buyers might purchase less often but invest in higher-priced items. Any number of variations on either can be the case.
Customer Lifespan: The average customer lifespan in the shoe industry can range from a few years to over a decade, depending on the store's ability to retain customers and foster brand loyalty.
Calculating Customer Lifetime Value
To calculate LTV, we imagined that the customer came in twice a year for five years and bought $200 each time. This became $400 annually and $2000 over the five years.
Calculating Household Lifetime Value
To determine the LTV of a household, we use the average number of adults per household. According to the U.S. Census Bureau, the average household size is about 2.6 people, and we can estimate that around 2 of these are adults. Assuming you will be only 50% successful in getting that second adult into the store, I believe the lifetime value of the household customer relationship might be $3,000.
That still is an important number and one worth fighting for.
Strategies to Increase Customer Lifetime Value
1. Implement Loyalty Programs: Reward customers for their repeat business with points, discounts, or exclusive offers. Loyalty programs can significantly increase the frequency of purchases and customer retention rates.
2. Provide Exceptional Customer Service: Ensure that every customer interaction is positive. Train staff to be knowledgeable, helpful, and attentive to customer needs.
3. Optimize Marketing Efforts: Use data to personalize marketing campaigns, targeting customers with relevant product recommendations and offers. Leverage email marketing, social media, and in-store promotions to engage customers.
4. Enhance the In-Store Experience: Create a welcoming and engaging store environment. Offer expert advice, personalized fittings, and an easy return policy to encourage repeat visits.