In recent years, all markets have matured and the hurdles for acquiring new customers have risen. Under these circumstances, emphasis is placed on how to nurture existing customers and have them continue using the service, and increasing LTV (lifetime value) is attracting attention.
Therefore, this time, we will explain what LTV is, how to calculate it, how to increase it, and examples of successful increases in LTV.
What is LTV (lifetime value)?
LTV
(Life Time Value) refers to “customer lifetime value.”
A figure that calculates the total amount a customer spends over a lifetime when using a company’s services. Customers can be not only individuals but also corporations. In the case of a corporation, it refers to the amount of profit earned from that corporate customer during the period from when the corporate customer starts doing business with the service until the end of that transaction.
This refers to the total amount of money that an individual or corporate customer would have to pay to a company before they no longer use the company’s service due to switching to another service.
I think you can get a rough idea of what I’ve explained so far, but especially if you’re dealing with products that you purchase on a regular basis, such as daily necessities, health foods, or cosmetics, or if you’re dealing with a billing subscription that requires you to pay a fixed amount per month. This is an important indicator when providing services such as
I will introduce the calculation method in detail later, but LTV (lifetime value) is treated as a marketing performance indicator.
The higher the LTV (lifetime value), the higher the customer loyalty.
The higher the LTV (lifetime value) value, the longer the service will be used. In other words, it can be expressed as having trust and attachment to the company or service. In marketing, this state is called a state of high “customer loyalty.”
In general, more loyal customers are more profitable for a company, and loyal customers can generate greater profits for a company over the long term.
In other words, by increasing customer loyalty, you can increase LTV (lifetime value).
Background to why LTV (lifetime value) is attracting attention in marketing
We definitely want to increase LTV (lifetime value), but let’s check the background of why LTV (lifetime value) has been attracting attention in recent years.
Intensifying competition due to market maturation
In recent years, all markets have matured, products have become more commoditized, and competition has intensified. The reality is that companies are struggling to acquire new customers.
In fact, it is said that the cost of acquiring a new customer is much higher than the cost of retaining an existing customer. As competition becomes more intense, the cost of acquiring new customers increases. Therefore, for companies, rather than acquiring new customers, valuing existing customers and encouraging them to continue purchasing and expanding usage is more effective for continuing to generate profits and maximizing profits. This way of thinking is becoming widespread.
Given this situation, there is a trend to emphasize measures to encourage continued use by existing customers, while conducting marketing and sales promotion activities to acquire new customers. For this reason, LTV has become an important metric for companies.
The rise of subscription services
Additionally, the rise of subscription-type services is said to be behind the increased emphasis on LTV.
A subscription-type service is a service in which you pay a fixed amount, such as a monthly fee, and can use products or services during the contract period. In recent years, subscription services for digital content such as videos, music, e-books, magazines, comics, flat-rate game distribution, and flat-rate software distribution have become popular. On the other hand, non-digital services such as fashion such as clothes, accessories, bags, and watches, as well as flat-rate services such as furniture and interior goods, are also attracting attention.
The popularity of these subscription-type services is said to be due to changes in consumer values. This sense of value refers to a shift from so-called material consumption to experience consumption, where people have begun to value the experience itself and pay for the experience, going beyond the value of the product itself. is. In response to this change in consumer values, subscription-type services that offer a variety of experiences are increasingly being created, and this market has evolved significantly.
According to research data from Yano Research Institute, the market size of subscription-type services in Japan in 2019 reached approximately 683.5 billion yen, and is expected to increase significantly year by year.
In this subscription-type service, LTV is an important service form from the perspective of “continuous” use and purchase, so each service provider is working on marketing with even more emphasis on LTV. Masu.
As people are forced to refrain from going out due to the spread of the new coronavirus infection, digital subscription services that allow people to enjoy their time at home are attracting even more attention.
These are said to be the reasons why LTV has attracted attention in recent years.
How to calculate LTV (lifetime value)
It can be said that implementing marketing using LTV as an indicator is appropriate for the current times. So, how can you specifically implement LTV? As a first step, let’s calculate LTV.
The basic formula for calculating LTV is as follows:
Average unit purchase price is the average unit price that each customer purchases.
Simply put, average purchase frequency is the average repeat rate. “How many times do most customers buy the same product in a year?”
Average retention period refers to the average length of time that a customer continues to use your product or service.
For example, let’s apply this formula to a certain health food product that has a monthly subscription course.
If the average purchase price is 2,000 yen, the average purchase frequency is once a month, 12 times a year, and 20% of the customers stop purchasing within a year, the average continuation period is 1 year ÷ 0.2, which is 5 years. .
Then, 2,000 yen x 12 x 5 = 120,000 yen, and the LTV of this product is 120,000 yen.
What this means is that for every customer you secure for this health food, you can expect sales of 120,000 yen per year.
LTV may also be expressed as the amount minus customer acquisition and retention costs.
LTV = (Average purchase unit price x Average purchase frequency x Average duration) – (Customer acquisition cost + Customer retention cost)
Advantages of calculating LTV (lifetime value)
By the way, why do you need to calculate LTV? Let’s take a look at its necessity.
For measures to maintain and expand existing customers
Earlier, I explained that the reason why LTV is attracting attention is that due to the intensifying market competition, there is a trend to value existing customers. This is also the basis for the need to calculate LTV. In order to avoid losing customers to competitors, you need to calculate LTV to understand the value of your products and services to customers, and to get customers to continue purchasing or purchasing other products. It is necessary to systematically implement measures to achieve this goal. Measures will only yield results if they are implemented strategically. For this reason, calculating LTV, which serves as an indicator, is a major premise.
A philosophy of valuing existing customers is born.
If you focus too much on acquiring new customers, you may end up selling out or responding on an ad hoc basis. However, the reality is that it is difficult to gain long-term trust from customers if you respond on an ad hoc basis. Therefore, by calculating the LTV and working to improve it, a mindset of valuing existing customers will emerge, and a tendency to value communication and support will emerge. It is said that LTV calculation has such philosophical meaning.
You can identify when customer satisfaction has decreased
LTV is closely related to customer satisfaction. Naturally, if the LTV value decreases, it is usually assumed that customer satisfaction also decreases. Therefore, if you calculate LTV regularly, if it goes down, you will notice that customer satisfaction has gone down, making it easier to discover the cause of the downturn. If problems are detected early, it will be easier to implement countermeasures. You can quickly restore and improve customer satisfaction.
Can improve customer loyalty
There are various benefits to calculating LTV and visualizing it as a numerical value like these.
Benefits of increasing LTV (lifetime value)
From here, we will explain the benefits of increasing LTV. Some of the content has been mentioned above, but it is important to understand what kind of benefits improving LTV will bring to your business.
Leads to stable business management
The biggest benefit of improving LTV is that it leads to stable business management. By providing value to existing customers and building good relationships with them, existing customers become fans of your company’s products and services. When people become fans of your company’s products and services, they will become attached to those products and services, and you can expect them to purchase your products and services over a long period of time.
Considering the “1:5 rule” mentioned above, it is of course important to take measures to acquire new customers, but it is also important to implement measures to improve the satisfaction of existing customers by purchasing products and services over a long period of time. This will allow you to increase stable sales.
You can expect to acquire new customers through word of mouth.
Another benefit of improving LTV is that you can expect to acquire new customers through word of mouth. When customers become fans of your company’s products and services, they will introduce the products and services they like to their friends, family, and other close people through word of mouth, and they will post reviews on social media. , it will start to play the role of a billboard.
Word of mouth from close friends tends to be more trusted than publicity methods such as online advertisements, so you can expect an increase in new customers from word of mouth. It will be important to improve LTV while keeping in mind the points that make existing customers want to share with various people.
How to increase LTV (lifetime value)
Now, let’s finally introduce ways to increase LTV.
To increase LTV, it is common to do the following:
- Increase average purchase price
- Increase average purchase frequency
- Increase average duration
- suppress costs
- Streamline customer acquisition costs
- Streamline customer retention costs
Regarding the above three items, remember the formula for calculating LTV: “LTV = Average purchase unit price x Average purchase frequency x Average duration.” It’s obvious when you see this. If you increase each value, the LTV value will increase because it is multiplication.
Other costs must also be streamlined. For example, if the customer acquisition efficiency is poor and costs are too high, no matter how high the LTV is, you will not be able to expect profits. The same goes for maintenance costs.
Here we will explain each method in detail.
Increase average purchase price
Increasing the unit purchase price of products and services will inevitably improve the LTV value. It simply means raising the prices of goods and services. However, raising prices excessively without considering the customer’s perspective can cause customers to leave. In particular, if customers are purchasing your company’s products and services because they are looking for low prices, many of those customers may end up going to your competitors. Rather than simply raising the prices of your products and services, consider it from the customer’s perspective and ask, “Will they be satisfied with the price increase?”
In addition, a common method to increase the unit purchase price is to have customers buy many of the same products, or to have them purchase more expensive products or multiple products. Getting someone to buy a more expensive product is called “upselling,” and getting them to buy related products as well is called “cross-selling.” If you increase the number of purchases of the same product, purchase a higher-ranked product, or purchase multiple products, the unit purchase price per purchase will naturally increase. By doing so, LTV will inevitably increase.
One way to increase the average purchase price is to pay close attention to customer success, which I will explain later, and to provide thorough follow-up. Additionally, if you are an online shop, posting recommended and related products on your website will make it easier to cross-sell.
Increase average purchase frequency
To increase the frequency of purchases, you first need to understand that the average purchase price is different. Increasing frequency is different from asking people to buy more. Frequency is based on the desire to “buy the same thing over and over again.” This is not just an issue of marketing and sales promotion, but also relates to the quality of the product itself. No matter how many additional purchases you make, what happens if the product is unusable? You will no longer be able to buy that product. This is an important point to continue.
Of course, the key is to follow up with customers. For example, it is said to be ideal to encourage customers to make a regular purchase at a good time, while being careful not to force them to do so, by saying things like, “It’s almost time for a regular purchase, what do you think?” In order to avoid giving the customer time to consider switching to another company, consider methods such as finding a good time and sending out information via email in a planned manner.
Maintain relationships with your customers by regularly disseminating information through direct mail and official LINE messages.
It’s good to send out information about your products and services that customers have used, but it’s also a good idea to send out information about upgrades to your products and services and information that is useful to your customers. If you can offer new possibilities to your customers, it may encourage them to make a purchase.
Increase average duration
The key to increasing the average retention period is to keep customers buying for as long as possible and to prevent them from leaving. This is also deeply related to what I have explained so far, but “customer loyalty” is important. It is important to get customers to trust and support your company and products. For this reason, it is important not only to be directly involved with customers, such as being empathetic when communicating with them and providing comprehensive customer support, but also to engage in activities that will earn them trust as a company.
Once a customer buys a product or signs a contract for a service, it is effective to implement customer success-oriented measures that provide generous support until the customer uses the product to create some kind of success. By helping customers achieve their goals, you can encourage them to continue using your product or service, rather than just selling it. This is especially effective for BtoB products.
We regularly disseminate information that customers want, provide information on how to use our products and services, and implement measures to help customers feel that this service is necessary for them. Sho. Subscription services also have the advantage of lowering the cancellation rate by disseminating such information.
suppress costs
It may be simple, but it is also important to keep costs down. No matter how high the selling price is, the higher the cost, the less profit you can make. Let’s look for materials and purchasing methods that can reduce costs, such as whether there is a way to purchase them cheaper than now. This “reducing costs” is up to your company’s efforts, and it is something you can start doing first. However, it would be unhelpful if the quality of our products and services deteriorated as we tried to control costs too much. We will continue to perform trial and error while maintaining the quality that satisfies our customers.
Streamline customer acquisition costs
Streamline the cost of acquiring customers, such as advertising costs. It doesn’t just mean lowering costs, it means implementing and optimizing them efficiently. Calculate the LTV and make adjustments by changing the way you spend advertising costs depending on the height of the LTV. If there are ads that are clearly not effective, you may want to stop using them or spend more on advertising for products with higher LTV.
Streamline customer retention costs
The key is to streamline costs such as support for retaining customers. Increasing customer loyalty through thorough after-sales follow-up is essential for increasing LTV, but it is also necessary to allocate the budget appropriately according to LTV.
The key to maximizing LTV is to be aware of everything at the same time.
As explained above, in order to increase and maximize LTV, rather than doing any one thing, it is necessary to increase the average purchase price, average purchase frequency, and average duration at the same time, which are related to each other. At the same time, it is important to streamline customer acquisition and retention costs. In other words, the key to maximizing your efforts is to take action while being aware of everything at the same time.
Of course, each item may require different actions. Improving customer loyalty is also relevant to everything. Implementing such various measures can be said to be the secret to achieving LTV improvement.
LTV (lifetime value) and customer success
By the way, let me explain in detail the term “customer success” that has come up in the discussion so far.
Customer success literally means “customer success.” Success means that after the customer has purchased the product or service, the customer uses the product or service to achieve the goals that the customer had in mind. Sellers tend to think that “if you sell, you are successful”, but for customers, “if you buy, you are successful”. Buying something has a purpose, and it is only when that purpose is achieved that it is a success.
For example, if you buy a month’s worth of health food, your goal is to obtain some health benefits by continuing to take one pill every day. To achieve this, you need to achieve results such as “continuing to drink every day” and “achieving good health.”
In a BtoB case, let’s say a customer signs up for a chatbot service to handle inquiries. Customers do not just contract and implement the chatbot service. You must use it to actually respond to inquiries and establish the chatbot as an inquiry response tool.
It is said that sellers and service providers can improve LTV by thinking about customer success when interacting with customers.
As mentioned earlier, if you follow along to create results after purchasing, you will reduce the risk of not using the product or service halfway through. Also, if you provide thorough follow-up, your customers will be able to achieve some kind of results, and you will gain their trust.
As a result, customers say, “I want to produce results like this again.I want to try not only this product, but also other products,” or “I was able to achieve results with this service this time because of this company’s support.” Because of this, people say, “This company is trustworthy.”
In this way, in order to improve LTV, it is important to be conscious of customer success and maintain close communication with customers even after the sale. The key is to be conscious of long-term relationships.
To this end, it is important to continue to come up with ideas and methods to strategically create customer success.
LTV (lifetime value) and CRM (customer relationship management)
LTV is also closely related to CRM (customer relationship management). Therefore, better results can be achieved by implementing LTV improvement measures together with CRM.
CRM (Customer Relationship Management) is a method that focuses on building relationships with customers to improve customer satisfaction. In many cases, this will mean putting the customer first. In recent years, we have heard this a lot, as tools are being used to capture and compile logs of communication with customers.
This CRM (customer relationship management) is also closely related to improving LTV.
This is because building good relationships with customers is essential to improving average purchase price, average purchase frequency, and average duration. It is difficult to approach customers unless you understand their behavioral characteristics.
Therefore, many companies are making good use of CRM to maximize LTV.
Based on the information accumulated with CRM tools, you can calculate LTV, formulate strategies, etc. At the same time, LTV can also be one of the indicators to measure the results of CRM.
It is important to proceed with mutual awareness of CRM and LTV.
Examples of increasing LTV (lifetime value)
Finally, let’s take a look at how you can specifically implement initiatives to maximize LTV (lifetime value) based on examples of increasing LTV (lifetime value).
Cosmetics manufacturer specializing in mail order improves LTV by holding offline events
Mail-order cosmetics manufacturers are working to strengthen relationships with customers by creating opportunities to interact with them offline. This can be said to be a measure that is unique to our mail-order specialty. By gathering around 1,000 fans of our brand and holding offline events multiple times a year, we strengthen the bond between fans and the brand and interact with each other, leading to increased trust and engagement with the brand. . Through these efforts, we also achieved an improvement in LTV.
Focus on improving LTV with a dedicated customer success department
An IT company provides cloud services and has set up a specialized department to provide customer success to its customers. This customer success department operates based on a strategic plan to prevent service cancellations and encourage upsells at the same time. We support customer success, improve customer loyalty, and maximize LTV.
Please refer to these examples, grasp the LTV characteristics and key points of the measures introduced this time, and aim to improve your LTV.
summary
◆LTV (Life Time Value) refers to “customer lifetime value.” A figure that calculates the total amount spent by a customer over their lifetime when using a company’s services.
◆The basic formula for calculating LTV is “LTV = Average purchase unit price x Average purchase frequency x Average duration.”
◆In order to increase LTV, it is important to increase the “average unit purchase price,” “average purchase frequency,” and “average continuation period,” as well as streamlining the “customer acquisition cost” and “customer retention cost.”