Have you ever gone out of your way — even after a long day’s work — to grab food from your favorite restaurant on the other side of town even though the same cuisine is just a block from your home? Did you pay a little extra for that clothing item you’re wearing because you have complete trust in the styles the brand offers? Are you so loyal to a specific smartphone brand that even the mention of competitors’ features and accessories makes you shudder?

If you’ve physically and/or mentally nodded your head to any of these questions, there’s a good chance you have a high Customer Lifetime Value (LTV). So why is that important to a company’s digital strategy?

What is Customer Lifetime Value?

An easy way to think of Customer Lifetime Value is to equate it to the dollar amount a customer spends to be loyal to a particular brand. If a consumer buys a specific product from the same online retailer consistently over a period of time, this person has strong brand loyalty and a high Customer Lifetime Value. LTV marks how valuable customers are and the strength of their brand relationship.

If you insist on buying a cup of Starbucks coffee that averages $4 just two times a week, it may not seem like a big deal to you or your pocketbook in the short term. However, over the course of two years, that can add up to a significant spend at Starbucks. Your Customer Lifetime Value to the coffeehouse giant is significantly more than it is for someone who will binge on Pumpkin Spice Lattes only during the fall.

“Brand loyalty and LTV usually go hand in hand,” according Michael Stone, Chief Relationship Officer at Wpromote. “By understanding the Lifetime Value of your customers, you can begin to change your digital marketing strategies to transform your acquisition efforts and your organization’s enterprise value.”

That’s why Wpromote offers a customer-centric and data-driven approach to digital marketing so that the agency’s clients not only survive but win and grow their businesses through the many digital channels in today’s world.

How to Calculate Customer Lifetime Value

While there are various equations to calculate Customer Lifetime Value, you can get an initial gauge by simply subtracting your acquisition costs — the amount of money it took for you to produce ads and campaigns to attract that customer and lead them to their first purchase — from the amount of profit you made by the customer purchasing our brand’s product.

For a deeper analysis of CLV, plug in the corresponding numbers to this equation:

Average Value of Product/Service Purchased

X Average Number of Transactions per Month

X Average Length of Retention (in Months) as a Brand Customer

= Customer Lifetime Value

Not only does this equation assign a numerical value to a customer but it also identifies that customer’s frequency of purchases and the types of products that are being bought. The length of retention is included to help recognize external factors that impacted why a customer stopped or continued purchasing products from the retailer. For example, a brand could have ended its free shipping, which could have acted as the primary reason a customer stopped purchasing items consistently, thereby ending their retention.

Why is Customer Lifetime Value Important?

Although presenting digital ads to potential new customers can garner new business, a greater potential for success lies in targeting your existing customers to increase retention and brand loyalty. Consumers who continually return to your brand will ultimately spend more, generating more revenue for you. If satisfied, these customers will also help you grow your business by recommending your brand to friends, family and loved ones through word of mouth – an advertising method that’s no additional cost to you.

“Chances are, 20 percent of your customers generate about 80 percent of your company’s revenue,” says Kimberlee Raymond, Account Director at Wpromote. “As a retailer, failing to focus on that 20 percent simply isn’t an option. Beyond retaining those top 20 percent, we need to understand who they are so we can find more customers like them. This saves us time and effort with new customer acquisition if we already know who our best customers are.”

As a retailer matures and moves beyond trying to earn that initial pool of customers, aiming digital marketing campaigns and messaging at loyal consumers will help grow profits today and well into the future.

There are two types of costs associated with acquiring customers: allowable costs and investment costs.

When you spend less on an ad campaign than the revenue you made from a first-time sale, this is considered an allowable acquisition cost. Its success delivers short-term profit. On the other hand, an investment acquisition cost is when marketing funds exceed the initial purchase. Even though this tactic seems risky, many brands will sacrifice those initial losses with the hope that they lead toward an increased Customer Lifetime Value and therefore a longer-term payoff.

Jenny Craig is an example of a business that has investment acquisition costs. Weight loss companies sometimes offer limited-time deals with much lower costs for customers. Those companies can spend thousands of dollars on digital marketing campaigns, initially surpassing the money they are receiving from new customers. However, once these customers fall in love with the product or service, they are more than likely going to extend their membership for multiple years. It’s these same customers — now considered loyal members — who are more likely to sign up for additional perks such as meal plans and products that surpass the initial losses in profits.

How to Increase Customer Lifetime Value for Your Brand

So how can your business boost Customer Lifetime Value to reap more profits? There are several avenues your brand can take including starting a loyalty program, investing in email campaigns, and launching targeted remarketing ads that will appear in front of your loyal customers even when they’re not on your website.

“By understanding your customers through LTV, you can begin to understand which products lead to your best customers,” Stone points out. “You can then change your messaging and advertising investments based off customer cohorts to drive desired behaviors.”

Implementing a loyalty program with perks can help solidify your customer-brand relationship for years to come. Special benefits such as exclusive discounts and free shipping will encourage current customers to make even more purchases.

The beauty brand Kiko Milano has a loyalty program that is free and easy to sign up for. Each purchase a customer makes translates into a certain number of points. Once the customer reaches a certain point level, he or she gets special perks such as discounts on purchases. The more points a customer has, the bigger their reward. Whether the shopper gains points slowly or rapidly, the loyalty program offers an added incentive to shop exclusively at Kiko Milano for make-up and skincare products.

Aiming regular communication at your customer can also lead to an increased CLV. Online retailers can take advantage of shopping cart email reminders that will guide a customer back to the company’s website, giving them another chance to shop and purchase. Unimposing email marketing messages can also showcase a limited-time sale or holiday offer that excites loyal customers and encourages them to shop some more.

Retargeting ads and campaigns can be powerful ways to generate a greater Customer Lifetime Value. Retailers can customize an online shopping experience by advertising items that a customer may like based on past purchases.

Remarketing ads — the ones that “follow you around” online no matter what website you’re on — can also be beneficial not only to convert a first-time buyer but to remind your loyal customer that you are still around.

Whether your brand has a small, loyal following or millions of customers, focusing on Customer Lifetime Value will bring you a constant lifetime value. So, be sure to identify your customers with a high LTV and devise and execute a strategy that will boost your brand name and ultimately your bottom line.