It’s important in a large number of industries, but in the world of retail finance, this metric reign supreme: Customer Lifetime Value (CLV). This is not just a number; it can be a blueprint for long-term success. The higher your CLV, the more revenue your business generates from each customer and the better your chances of outpacing competitors. But here’s the catch: maximising CLV isn’t as simple as keeping customers happy. It requires strategy, insight, and tools that deliver actionable data.
Enter the cohort plan, a powerful technique that’s revolutionising how businesses optimise CLV, across industries like subscription-based businesses, banking and financial services, telecommunications, utilities… the list is long.
In this blog, we’ll focus on the retail industry as an example, to break down what CLV is, why it matters, and how a cohort-based approach can transform your customer strategy.
What Is Customer Lifetime Value?
At its core, CLV is a measure of how much revenue a customer will bring to your business over their lifetime. It’s a forward-looking metric that answers a crucial question: How valuable is this customer to my business?
There is a straightforward formula to calculate CLV:
CLV = Average Spend × Purchase Frequency × Customer Lifespan
For example, if a customer spends £50 per visit, visits 12 times a year, and stays with your brand for three years, their CLV is:
CLV = 50 × 12 × 3 = £1,800
But not all customers are created equal. Some will visit frequently and spend generously, while others may churn after a single purchase. Understanding these variations is where the magic happens… that’s where cohort analysis comes in.
What Is a Cohort Plan, and Why Does It Work?
A cohort is simply a group of customers who share a common characteristic, such as the month they made their first purchase or their average spend. A cohort plan segments your customer base into these groups, allowing you to analyse their behaviours over time.
Why is this important? Because it reveals trends and patterns that traditional metrics often miss. For example:
- Are customers who joined in January spending less after six months?
- Do high-value customers respond better to discounts or loyalty rewards?
- When do most customers tend to churn, and why?
By tracking these insights, you can create targeted strategies to retain customers, increase their spending, and extend their lifespan, all of which boost CLV.
Why CLV and Cohort Plans Matter
If you’re not tracking CLV, ideally using a cohort plan, you’re leaving money on the table. Businesses that focus on CLV reap benefits like:
- Smarter Marketing: By knowing your customer cohorts and how much a customer is worth, you can spend your marketing budget more effectively.
- Improved Retention: High CLV customers are more likely to stay loyal, but only if you give them a reason to.
- Better Forecasting: CLV and cohort analysis help predict future revenue, giving you a clearer picture of your business’s financial health.
Increasing customer retention by a small number can boost your profits by a much bigger number, due to the potential for repeat purchases. That’s the power of focusing on CLV.
The Retail Finance Solution Edge
Using a cohort plan is one thing; supercharging it with a retail finance solution is another. The right technology can:
- Automate Cohort Tracking: No more manual spreadsheets. Real-time insights let you focus on strategy, not data wrangling.
- Predict Churn: Advanced analytics help you identify when customers are likely to leave so you can intervene.
- Personalise Offers: Tailored promotions and loyalty programs keep customers engaged and spending.
- Boost Retention: With actionable insights, you can re-engage dormant customers and turn them into loyal advocates.
Meet Sarah, a loyal shopper
Let’s bring this to life with an example.
- Sarah shops 12 times a year, spending £50 on pet food per visit. Over three years, her CLV is £1,800.
- Using a retail finance solution, the business noticed Sarah’s cohort showed a drop in spending after Year 2, perhaps she has found another pet store she sometimes passes?
- A personalised offer was emailed to her, giving 20% off her most frequently purchased product, her dogs favourite food. This brought her back, extending her relationship with the brand to five years and boosting her CLV to £3,000. She was considering an alternative dog food brand, but targeted offers kept her loyalty.
The result? A delighted customer, a dog with a waggy tail and a healthier bottom line.
How to Get Started
Ready to unlock the full potential of your customers? Here’s how to begin:
- Segment Your Customers: Use cohort analysis to identify groups with shared behaviours.
- Track Key Metrics: Monitor spending trends, retention rates, and churn patterns within each cohort.
- Invest in the Right Tools: A retail finance solution can automate processes, provide actionable insights, and enable personalised strategies.
- Act on Insights: Don’t just collect data, use it to your advantage. Tailor your marketing and loyalty efforts to meet customer needs.
Final Thoughts
Maximising CLV isn’t about short-term wins; it’s about building lasting relationships with your customers. A cohort plan, combined with the power of a retail finance solution, gives you the insights and tools to achieve just that.
Are you ready to take your CLV strategy to the next level? Let’s start turning first-time buyers into lifelong advocates today!
