In the modern business world, you'll often hear the term 'customer lifetime value' being thrown around. Customer lifetime value, or CLV, has become a critical measure for many companies. And it's one that any business owner would benefit from knowing well.
First things first, what does customer lifetime value actually mean?
In a nutshell, customer lifetime value refers to a customer's worth to a business for their entire relationship.
One of the reasons why CLV is a key metric for businesses is because it's more cost-effective to retain existing customers than it is to get new ones. For example, if the CLV of an average café is £500 and it costs more than that to get new customers, the café would find themselves losing money unless they minimise their acquisition costs.
Take some time to assess your customers' value and use that information to shape all future marketing and business decisions.
Can discounting affect your CLV?
When it comes to creating a discounting strategy, there are certain things to look out for.
Some businesses fear that frequent discounts can devalue their brand and affect their long-term financials. But how valid is that fear? Does discounting actually negatively impact CLV and sales performance?
Let's take a closer look.
Discounts help you get that first order from a customer, but giving the customer a reason to come back is what makes all the difference.
There's no debating that discounts are one of the easiest ways to get consumers interested in making their first purchase. But what happens next is crucial for retention.
If you don't compliment your discount with a compelling loyalty program or relevant marketing and offers, you're much more likely to lose them. If discounting is all you plan to do, you won't be ensuring that customers fulfill their lifetime value potential with your business.
Not only will constant discounts directly take away from CLV if you keep them up, but they will also devalue what you offer. Customers will come to expect lower prices and might refuse to do business with you at your regular rates.
For this reason, we recommend complementing your discounts with a loyalty program that's designed to nurture and retain customers with relevant offers and rewards. This gives them the incentive to keep coming back, even when your products are no longer discounted.
The size of the discount itself matters.
How big your discount is can have a great effect on the CLV, as different levels of discount will attract different types of customers.
Company data has proven that 0-5% discounts tend to have a low impact.
In comparison, discounts of 5-10% attract customers with the highest average CLV. This is the sweet spot where customers are interested enough in your brand to purchase a product without a huge discount. And they will still appreciate the gesture of a small price cut.
High discount customers are unlikely to make purchases when your products aren't on offer. They tend to seek out sales and buy items only on discount.
Discounting can increase CLV, but not if you use a 'one size fits all' approach.
It's important to point out that there are instances in which discounting can help to increase CLV. This will only occur if you use a more tailored approach to discounting than to apply one discount for all your customers.
Consider the customer and the timing and then shape your discounting strategy around it. Use actual data to run discount campaigns and experiment until you find a way to run discounts that is profitable, both in the long term and short term.
This data can help you appeal to new customers at the right time, without hurting your bottom line in the long run. It can also help you reward your customer in an individualised way that is meaningful to them. The more customers are connected to your business and feel rewarded, the bigger their CLV is likely to be.
At OMG, we can help you make informed decisions for your discount and cashback campaigns.
Want a little extra help to build a discounting strategy that keeps customers coming back for more?
We've created a platform to help business owners roll out their discount campaigns with ease. Using our platform, you can also easily adapt your cashback and discount campaigns based on your needs.
You have full control, adjusting discount amounts, duration, and collecting valuable data in the process.
Get in touch with the team at OMG and find out how we can increase your customer lifetime value.