How knowing your customer's satisfaction will boost their lifetime value
A customer has found your product, browsed your website, made an order and finally paid. High Five on a job well done! Now while most non-marketers would consider their work accomplished, we marketers know that the journey is far from over. Depending on how harsh we want to be, we will tell you that the cost of getting a new customer interested are between 3 and 30 times higher than the cost of retaining an already existing one.
Even though marketers know about the importance of customer retention, it’s often overlooked in daily business. It just sounds so much cooler to convert new customers, than re-satisfy current ones, right?
You have to take a much closer look at your current customers, define your especially happy ones and eventually, use them to generate new business. Your new favorite values are going to be the Net Promoter Score© (NPS©) and Customer Lifetime Value (CLV).
In this guide, we’ll tell you what they are, why they are so important and how they are connected.
Net Promoter Score© - Your new favorite number
The Net Promoter Score© (short NPS©) was first established in 2003 by Reichheld, a partner at Bain&Company. His goal was to find a figure to measure and track customer loyalty. The NPS© can be measured easily by sending quick surveys to customers post-purchase. A survey question could be as simple as “How likely would you recommend Product X to a friend?”. The scale for the answer is 0-10, 0 being extremely unlikely and 10 being very likely to recommend.
The scores of the surveys are then structured into three categories:
- “Promoters” - These are who you are after! Score: 9 or 10. These are considered loyal customers, who have bought from you several times before and will continue doing so, while at the same time, convincing friends to buy from you.
- “Passives” - The boring middle. Score: 7 or 8. These customers are somewhat satisfied but don't have a deeper connection to your product or brand and are therefore likely to switch to a competitor. They also tend to not promote you to their peers.
- “Detractors” - A danger to your brand. Score: under or equal 6. Here you will find unhappy customers who are actually more likely to damage your reputation than to refer you to peers.
Your NPS© is the percentage of Promoters minus the percentage of Detractors. You should receive a percentage between -100 and 100. If you want an easy and fast way to determine your customer loyalty with the Net Promoter Score, check our unique system.
Net Promoter Score© Calculation Example: Company B hast 75% Promoter, but 15% Detractors. The NPS© is 60%. Scores over 50% are considered good, but there is a lot of room for improvement for Company B.
What makes the NPS so important?
Studies show, that Promoters are responsible for over 80% of referrals in a business context. On the other hand, Detractors are accountable for 80% of the negative word-of-mouth generated in a business context. Ouch!
Still not entirely convinced? Besides the fact that promoters naturally have more profitable relationships with a company or brand, the company with the highest NPS in a specific industry will most likely outgrow its competitors by more than double. (Net Promoter System, 2013)
Use the Net Promoter Score© for…
- … measuring, evaluating and building customer loyalty
- … increasing customer satisfaction
- … creating more customer advocates (NPS score over 50%)
- … getting more and relevant customer feedback
- … reduce customer churn
- … drive growth and boost Customer Lifetime value (see next chapter!)
Customer Lifetime Value - A number to get obsessed with
The Customer Lifetime Value (short CLV or LTV) is a figure for the projected revenue that a customer will generate during their lifetime as a customer at a specific company. Among marketers, the Lifetime Value is seen as a master metric that can guide marketing budget allocation by tying together other important metrics like e.g. the Net Promoter Score. Ultimately, the CLV is simple - the greater the lifetime value of your customers, the more revenue you will generate.
For subscription-based services, calculating the Lifetime Value is a piece of cake, as it is equal to the result of average subscription length multiplied by the monthly subscription costs. For any other business, the CLV is more complex. We recommend you to check out this guide by Kissmetrics to calculate the Lifetime Value for your business. In general, you will have to take the following factors into account:
- Average Customer Lifespan - how long will the customer buy your products?
- Customer Retention Rate - the percentage of customers who re-purchase one of your products.
- Profit Margin per Customer - how much profit do you make from the customer?
- Rate of Discount - somewhere around 15%, this number is the interest rate connected to your cash flow analysis.
- Average Gross Margin per Customer Lifespan - Profit margin percentage multiplied by average spending.
Especially when it comes to generating stable revenue and organic growth, getting your loyal customers back to the beginning of your marketing funnel (repurchasing) is extremely important. Companies who only focus on generating new clients have more problems achieving long-term growth and success mainly for this reason. Only loyal customers generate a constant revenue flow and can help you build a brand that will attract new customers.
How to boost Customer Lifetime Value
There is only one truly effective way to boost your CLV - by increasing customer satisfaction. Research has shown that even a satisfaction increase as small as 5% can lead to profit growth as high as 95%. At the same time, studies have shown that acquiring a new customer can cost you 7 times more than keeping an existing one happy and active.
So, what is the best way to measure customer satisfaction and increase it? Of course, the Net Promoter Score.
Net Promoter Score + Customer Lifetime Value = Boom!
The Net Promoter Score and the Customer Lifetime Value are closely connected. The higher your NPS© score, the more likely your customers are not only to stay loyal to your business, but also to promote it to others, subsequently growing your customer base.
So instead of the just looking at the value a single customer brings to your business, look at his or her value plus the value of the customers buying from you because of a direct referral. Once you make this connection, it's easy to see how important scoring a high NPS© is. As it measures your customer satisfaction, it is the most direct influence on the Lifetime Value of your customers.
Find out your NPS© today and increase your customer satisfaction. Improve your score by working on your product or service and activate your customers for referrals. This will ultimately build loyalty and increase your Customer Lifetime Value.
Mini Case - How does this work in real life?
Let's look at an example. Company X wants to grow their CLV. They talk to a consultant who advises them to survey their customers to find out their NPS. It turns out that their NPS is 35 - this means that Company X's customers aren't very satisfied and very unlikely to refer the company to their friends. Actually, they are more likely to spread negative word-of-mouth that could damage Company X's reputation.
Company X decides to work heavily on their NPS score. They give out discount codes to their customers and upgrade their products. After half a year, their NPS has gone up to 70. Yay! Company X now has increased their Customer Lifetime Value, but they want to increase it even more by activating satisfied customers for referrals. They decide to use an SMS-based survey system to find satisfied customers right after they've made a purchase. Then they activate these customers for referrals by giving them discounts if they share their positive experience with their friends.
After another 6 months, Company X has not only dramatically increased the CLV, but also reached an NPS of 85.
Customer experience is the best way to hack your company's growth. Use the Net Promoter Score to hold yourself accountable for the level of service and quality you deliver to your customers. You are only one simple question away from valuable feedback that will help you distinguish satisfied customers.
Use the Net Promoter Score as a base for increasing Customer Lifetime Value and growing your revenue. Try out our unique tool to measuring and working with your NPS.
The NPS and CLV are tied together by customer satisfaction as the most important lifetime value factor. While the NPS helps you measure your customer satisfaction and increase retention, it also helps you distinguish satisfied customers that you then can activate to find new ones and increase their Lifetime Value. There are many ways to attract new customers, but using the combination of NPS© and CLV might just be the best one.