Understanding Customer Lifetime Value (CLV) in the Indian Market
Introduction
In a rapidly evolving Indian market, understanding customer behaviour is critical for sustainable business growth. Customer Lifetime Value (CLV) is a key metric that helps businesses evaluate the total revenue a customer can generate throughout their relationship with the brand. This article will explore what CLV is, why it matters, and how to calculate it using Indian examples.
What Is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) quantifies the total revenue a customer is expected to bring to a business over their lifetime. For instance, consider a loyal customer of a car brand like Maruti Suzuki, who buys four cars over 20 years, with an average cost of ₹7 lakh each. Their CLV would be ₹28 lakh. Conversely, a customer who visits a local chaiwala every day, spending ₹30, would have a CLV of ₹21,900 over 20 years.
Understanding CLV is vital for businesses to determine how much to invest in acquiring and retaining customers.
Reasons to Know Your CLV
- Determine Customer Acquisition Cost
Knowing CLV helps businesses decide how much to invest in acquiring new customers. For instance, if a customer is expected to spend ₹10,000 over their lifetime, businesses can justify spending more on marketing to attract such customers.
- Improve Profitability Over Time
By focusing on increasing CLV, businesses can ensure consistent revenue. For example, a high CLV in a grocery chain like Big Bazaar allows for greater stability and helps maintain profitability during slow seasons.
- More Accurate Forecasting
CLV aids in making informed decisions about inventory and workforce needs. A fashion retailer like FabIndia can forecast demand based on customer purchasing patterns.
- Refine Business Strategy
Understanding CLV can help businesses tailor their strategies. If a brand identifies a low CLV, they may need to invest in loyalty programs, while a high CLV indicates strong customer satisfaction.
- Better Understand Loyal Customers
Analysing CLV can reveal insights into loyal customers’ behaviors. For example, companies like HDFC Bank can track spending patterns to enhance customer engagement.
How to Calculate Customer Lifetime Value in 4 Steps
Determine the Average Order Value
Assess the average amount customers spend. For an e-commerce platform like Myntra, analysing average transaction values helps in estimating CLV.
Identify Frequency of Transactions
Understand how often customers make purchases. A customer who orders food from Zomato five times a month provides a different CLV compared to someone who shops from Amazon once a month.
Measure Customer Retention
Calculate how long customers typically remain loyal. Brands like OYO may find that customers return for stays multiple times a year over several years.
Calculate CLV
Use the formula:
CLV = Average Order Value × Number of Transactions × Average Length of Customer Relationship (in years)
For instance, if a customer spends ₹2,000 on an online shopping site like Flipkart every month for 5 years, the CLV would be:
₹2,000 × 12 × 5 = ₹1,20,000.
Examples of CLV in Different Industries
- Grocery Store
A customer who spends ₹1,500 weekly at a grocery store like D-Mart for three years would have a CLV of:
₹1,500 × 52 × 3 = ₹2,34,000.
- SaaS Service
A startup using a project management tool like Zoho spends ₹1,000 monthly for 3 years:
₹1,000 × 12 × 3 = ₹36,000.
- Hospitality
A family that books vacations through MakeMyTrip, spending ₹50,000 every two years for ten years, has a CLV of:
₹50,000 × 5 = ₹2,50,000.
How to Improve Customer Lifetime Value
- Create Loyalty Programs
Companies like Tanishq offer rewards programs that encourage repeat purchases, enhancing customer loyalty.
- Increase Average Order Value
E-commerce platforms can provide discounts on bulk purchases. For instance, Myntra could offer discounts for buying multiple clothing items.
- Launch Post-Purchase Email Campaigns
Sending personalized emails with discounts, similar to how Swiggy offers special deals for repeat customers, can boost retention.
- Product Recommendations
Using data analytics, brands like Amazon India can recommend products based on previous purchases, encouraging more spending.
- Create Personalized Experiences
Brands like HDFC Bank tailor their services based on customer behaviour, enhancing loyalty through personalization.
- Provide Quality Customer Service
Companies like Zomato focus on resolving customer issues quickly, ensuring a positive experience that fosters loyalty.
Streamline Customer Experiences
Brands like Flipkart provide a seamless shopping experience across devices, enhancing customer satisfaction.
Make Returns Easy
Retailers like Nykaa offer hassle-free return policies, encouraging customers to shop with confidence.
Conduct Actionable Surveys
Brands can gather feedback through surveys to understand customer satisfaction and improve offerings.
Common Mistakes Around CLV
No Segmentation: Failing to segment customers can lead to inefficient resource allocation.
Wrong Segmentation: Incorrectly targeting customer segments can waste marketing budgets.
Unrealistic CLV Expectations: Setting unattainable CLV goals can lead to frustration and wasted resources.
Lack of Flexibility: Businesses should adapt to changing market conditions and adjust their CLV strategies accordingly.
Conclusion
Customer Lifetime Value (CLV) is a crucial metric for businesses in India to gauge long-term profitability and customer engagement. By enhancing CLV through targeted strategies and avoiding common pitfalls, companies can build lasting relationships with their customers, ensuring sustainable growth in a dynamic marketplace.
