Customer engagement and lifetime value (LTV) share a direct relationship. A healthy customer engagement ensures that customers remain loyal and help lengthen their lifetime value.
Akin to the popular Butterfly effect that spurs into action a host of other reactions, healthy customer engagement can actually help offset the cost of acquiring new customers and also bolster the bottom line of your business.
This blog takes a crack at how customer engagement and LTV are directly related to each other and how each metric influences the long-term success or failure of a business.
Before that, it is necessary to get a deeper understanding of what LTV is and how it is measured.
Table of Contents
Understanding LTV (Lifetime Value)
In marketing parlance, customer LTV is a measure of the revenue that a business will earn from a long-term relationship with the business.
It is a critical measure as it helps businesses to make several economic decisions including product pricing, discounts and offers, and long-term product roadmap. The higher the LTV, the better for the business.
For consumer brands whose success or failure is reliant on the relationship that the customer has with the brand, LTV is a crucial metric. It spares them from having to invest in repeat Customer Acquisition Costs (CAC) for expanding the customer base.
LTV is measured by multiplying the average order value with the number of transactions and retention time period.
CLV, which stands for Customer Lifetime Value, is calculated by multiplying LTV with the profit margin.
LTV and CLTV explained with an example:
if a customer spends $100 annually with your store and shops every two years, the LTV will be calculated as:
$100 * 1* 2 = $200
If the business has a profit margin of 20%, then CLTV will be calculated as:
$100 * 2 * 20% = $40
Lifetime value on its own may not help a business come to logical conclusions about its future growth possibility. It is when LTV is paired with CAC (Customer Acquisition Costs) that we get a true picture of how the business is positioned currently and what needs to improve to maximize LTV.
In most cases, improving customer engagement is the ultimate solution to improving LTV. This is true across consumer brands in all different industry verticals.
LTV: CAC — The Northstar metric that can redefine your growth
The Customer Lifetime Value to Cost of Customer Acquisition (LTV: CAC) ratio aims to measure the relationship between the lifetime value of a customer and the cost of acquiring that customer.
In an ideal world, the LTV of a customer should be higher and the cost of acquiring a new customer should be lower. In the absence of such a scenario, the business will be continuously spending on acquiring new customers which could stagnate its bottom line or even drive it to lose in the long term.
It is necessary for every business to maximize LTV while keeping CAC down. It is here that Customer Engagement comes into play.
Customer engagement can be defined as the several interactions that the customer has with the product or service. The engagement is considered to be positive if the customer is getting their problem solved, enjoys a positive experience in the process, and would want to return for a similar experience.
Consecutive positive customer experiences can make the customer loyal to the brand thereby increasing their LTV. In short, it is evident that customer engagement has a strong influence on LTV.
There are three specific ways how customer engagement influences LTV.
Engaged customers spend 5x more than traditional customers
Studies suggest that engaged consumers buy 90% more frequently, spend 60% more per transaction, and are five times more likely to indicate it is the only brand they would purchase in the future.
There are two reasons that drive repeat purchases from engaged customers. First, they are already aware of the brand and the way it works. They have also received first-hand experience of how the brand treats its customers.
As a result, they continue to stick to the same brand as long as it delivers on its promise. It spares customers from the chore of experimenting and identifying another worthwhile replacement for their regular purchases.
Second, most consumer brands have formulated compelling loyalty programs, messaging systems, and personalized communication that keeps their name alive on the customer’s mind.
This ensures that the customer is not given an opportunity to consider another brand. This leads to incremental purchases from the same brand for new products that the customer may not have bought earlier.
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Customer experiences surpass price and product as key differentiators
Studies conducted by PwC and several other think tanks have found that millennial customers regard customer experiences as a differentiator that surpasses price and product. Also, they are willing to pay a premium price to a brand that offers a superior customer experience than others.
Since customer experience is a subset of a customer engagement strategy, the influence that it has on LTV cannot be overlooked.
There is a unique trait that almost all engaged customers share across all industries and demographics. They refer new customers from their personal circle.Also, business referrals are rated the second-highest source of quality leads compared to other sources (Forbes)
As referral leads cost almost nothing to interact with and convert, they are extremely beneficial for businesses. That said, the positive influence of this can be attributed to customer engagement.
How can consumer brands improve LTV:CAC ratio
As is evident by now, the key to improving LTV:CAC ratio is to maximize customer engagement. Unfortunately, there is no silver bullet that can improve customer engagement overnight. An intelligent tool is required to understand user behavior, orchestrate customer journeys, and personalize them accordingly.
In fact, to truly gain valuable insights that you’ll need, you probably want to dedicate some time to the customer or user journey mapping. This alone can help you significantly increase customer engagement and deeply understand the issues faced by your customers.
The Insight-led Engagement framework below is a growth flywheel that is aimed at helping consumer brands improve their LTV:CAC ratio. These frameworks go beyond the known precincts of personalizing, engaging, and retaining customer experiences.
It enables businesses to take a data-driven approach to understand what maximizes customer engagement, why customer churn, and the various ways to reduce churn.
A real-life example of how 1Weather improved mobile user engagement by 3X
1Weather is a top-rated weather app in the US. The app provides real-time weather updates to its 8 Billion users. However, 1Weather had difficulties delivering real-time hyper-local updates that were personalized to the user’s location and preferences.
The insight-led engagement framework enabled 1Weather to automate the entire process of delivering hyper-local and personalized suggestions. The weather update app was able to conquer this challenge while adhering to data security and privacy practices applicable in the U.S.
1Weather was able to:
Increase app opens and engagement by 10%
Improve CTRs with relevant push notifications by 15%
Improve Content Engagement Score (CES) by 20%
With MoEngage’s Customer Engagement Platform, 1Weather was also able to have a detailed view of users’ daily interaction with notifications, the overall DAU growth, detailed user events like the first and return visit, among many other data points.
Author’s Bio:
Pulkit drives growth through content at MoEngage. His experience as a B2B marketer comes fueled with a passion for user-centricity, affinity for data, and a love for technology, movies, comics, and gaming.
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Amazing! Your blog was absolutely fantastic! Large amount of great information which is often attractive some and the other way. Thanks. multi-vendor marketplace ecommerce
Amazing! Your blog was absolutely fantastic! Large amount of great information which is often attractive some and the other way. Thanks.
multi-vendor marketplace ecommerce