Have you ever seen or read about the hordes of people camped outside an Apple Store or an Apple affiliate retailer for days prior to a new product release, just so that they can be one of the first to buy it? And when they come out of the store, they proudly show it off to the others in line. It’s like they just received the Holy Grail!
I am left baffled looking at these crowds. At the same time, I look at Apple in awe for its ability to generate this kind of response for its products.
What’s Apple’s secret for driving these kinds of sales? Having a great product with new technology, features, designs and software is a necessity, but that’s not enough!
Starbucks is another company whose success has left me stumped. Why would any consumer go to Starbucks about 4.2 times per work week and spend approximately $5.90 each time for a cup of coffee when there are lots of less expensive competitors to go to?
If we tried to justify the investments Apple and Starbucks make for an iPhone or a single cup of coffee, the return on investment (ROI) doesn’t make financial sense. But what these companies share is a business model built not on selling one product at a time, but on a long-term view based on the concept of customer lifetime value (CLV).
What is CLV?
CLV is the present value of future cash flows attributed to customer relationships. It is a financial measure that assesses customer prospecting and firm value, which has been widely accepted as a metric to measure customer performance.
Zhang, Liang and Wang (2016) suggested two main methods of calculating CLV:
- The simple retention model, which assumes that customer acquisition and retention is a stable process.
- The Markov migration model, which maintains that some customers may temporarily skip purchasing for a period or two and then resume purchasing later. This model includes a new dimension of CLV – acquisition rates – to explain the movement of customers’ purchasing behaviours.
Incorporation of a CLV philosophy into your strategic business thinking can change your entire perspective of what you do and how you do it. Let’s consider Starbucks as an example. Transactionally, it sells a cup of coffee for $5.90. Considering a slightly longer timeframe, it sells a cup of coffee 4.2 times per week for $5.90 for a total value of $123.90 per customer. Considering a long-term view, it sells a cup of coffee 4.2 times per week for $5.90 for a retention time of 52 weeks each year. We now have a very valuable customer who is spending over $6,400 annually.
Thus, looking at things transactionally, providing charging stations and free Wi-Fi is not justifiable. However, considering a longer timeframe of a month, a year or a lifetime, it makes perfect and justifiable sense from an ROI perspective. Moreover, because the transaction value and frequency of visit is measured with CLV, the effectiveness of new strategies, products and programs can be vindicated easily. However, building a relationship to maximise CLV depends on the consistency of quality and service standards and the overall experience delivered (Kumar 2010).
How does Apple manage its CLV?
Apple iPhone customers have an estimated value of approximately $700–$900 for two years. Thus, over a 20-year period, the average worth of an iPhone customer is $8,000. Such customer loyalty is possible only because Apple takes care of its customers. Apple provides free help and support to customers if their product is still under warranty and has a dedicated online forum for each of its products wherein experts solve customer queries.
This type of after-sales service makes Apple customers feel valued and ensures their longevity as a loyal customer to the extent that 90% of consumers who buy iPhones intend to buy the newest iPhone when it’s time to upgrade. Without Apple’s adequate customer service, that percentage would be a lot lower.
How to increase CLV?
Businesses can increase their CLV through various methods:
- Loyalty Promotions: Customers love various discounts and offers, and loyalty programs are a proven strategy for increasing brand loyalty and customer spending.
- Bring Back Lost Customers: Remind past customers about the brand via well-crafted emails. Time-based offers create a sense of urgency that compels the customer to take immediate action.
- Expanding Outreach Strategies: Social media interaction is a great way for brands to reach out to their customers, provide support, and present the human side of the brand.
- Upselling: Selling extended warranty or related products, such as offering a free antivirus software subscription with the purchase of a laptop, is a good and effective way to increase CLV.
CLV philosophy requires changes in the way you think, the things you do and how you do them. The longer it takes to start this approach in your business, the more it delays the lifetime benefits you can accrue.
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