Your Ultimate Guide to CLTV: Strategies From Seed to Scale

For DTC brands looking for sustainable long term growth and profitability, understanding and optimizing customer lifetime value (CLTV) is a necessity. It takes a multifaceted approach that combines crafting efficient ways of acquiring new customers at scale, with continuously improving retention tactics that grow those relationships over time. 

With competitive pressures heating up across industries, brands should keep a strong focus on customer centricity and CLTV to drive growth. In fact, increasing customer retention by just 5% can boost profits by up to 25%, depending on the industry (source). This stat highlights how crucial CLTV is and how it can have a ripple effect across your business. 

Cracking the Code: Formulas and Key Drivers

As a general definition, CLTV is a measure of the total revenue per customer that's generated for a brand over their lifetime, accounting for acquisition cost - however, there are multiple definitions.

Depending on the type of business, here are two ways to think about it:

• One-time purchase: CLTV = (Average Order Value (AOV) * Average # of Orders per Period * Average Customer Lifetime) - Customer Acquisition Cost (CAC)
• Subscription-based: CLTV = (Monthly Recurring Revenue (MRR) * Average Customer Lifetime) * (1 - Churn Rate)
  
  

The key factors that influence CLTV regardless of what your business is are AOV, CAC, order frequency, and customer lifespan. 

As the co-founder of baby apparel brand, Any Baby, I’ve controlled these levers first-hand. Due to high minimum quantities, we launched with one SKU, leading to a low CLTV and high CAC. We introduced a second style and it immediately affected customer behavior, creating a higher frequency of orders and units-per-transaction (UPT). We listened to our customers asking for larger sizes, and created a two-item set. That action significantly increased repeat purchase rates, AOV, and most importantly the customer lifespan by 6-12 months, enabling marketing opportunities and higher CLTV. We used these types of merchandising tactics to improve KPIs and directly impact CLTV. 

For brands that are consistently able to get customers to repeat purchase or subscribe for long periods of time, it’s easier to build a strong CLTV. Each of these factors can be influenced by creating marketing campaigns that hit psychological triggers and website UX that is experimentation-driven.

The goal is to create a seamless customer journey that gets users from landing page to checkout with little friction and plenty of opportunities for upsells and cross-sells. 

The same applies for businesses that require an omnichannel approach. 

Each channel needs to generate the right KPIs to drive CLTV higher, and each stage of growth requires different strategies whether at seed or maturity.

Stage-Specific Strategies: Optimizing CLTV Across the Growth Spectrum

Planting the Seeds: Focus for Early-Stage Brands

At the seed stage, you’re unable to rely on brand awareness or equity with any mass audience, so the focus has to be on high-quality customers coming through the top of the funnel at a low CAC. 

The primary goal should be to master the marketing channels that provide the best ROAS and access to your audience. 

For example: ecommerce brands rely heavily on Meta and Google to drive traffic to their digital storefronts with precise targeting. Avoid tactics like sweepstakes, flash sales, or TV as they yield high traffic that does not convert well. 

For seed stage brands, it’s key to nurture customer relationships with personalized communication and best-in-class experiences in order to increase CLTV. According to a case study by Klaviyo, European brand Tatti Lashes uses their welcome SMS flow to capture a high quality customer with a 30% click-through-rate (CTR) that converts at 9%. 

Email and SMS automation can be powerful tools for brands looking to jumpstart revenue and increase CLTV without high spend. Understanding your customer by capturing information like birthday, anniversary date, category and product preferences, can help brands personalize messaging and promotions. Brands can gather this information by setting up a section in their account portal that allows users to save multiple dates and preferences. Even as simple as adding a ‘wishlist’ feature on the digital storefront helps to indicate what each customer is interested in. Using these data points, the email/SMS flows can be automated and targeted for easy follow-up and conversion, both improving CLTV and the customer experience.

The Growth Spurt: Data-Driven Optimization and Customer Experience

In the growth stage, the emphasis transitions to optimizing the customer experience and harnessing data to make much more informed decisions. Many brands should consider switching to a conversion rate optimization (CRO) mindset because after creating the foundation of the business, higher growth will require consistent experimentation across channels. 

In order to move quickly, it's helpful to create an A/B testing roadmap which can be used to prioritize the pipeline, even using a framework like RICE (reach, impact, confidence, effort) to score each initiative and get buy-in across teams. This could include tests like: streamlining the checkout flow, increasing email/SMS sign-ups, and helping intra-funnel metrics like add-to-cart or product-view-rates. A test-and-learn methodology will lead to a lot of data that showcases customer behavior preferences and unlocks CLTV potential. 

However, brands should be looking through all customer touchpoints for white space opportunities. 

For example, at this stage it’s important to measure customer satisfaction (CSAT) and net promoter scores (NPS) to make sure customers are getting great service and are promoting your brand. Data analysis around merchandising, marketing, and operations will all inform a point of view - things like category and product selling, advertising data, and shipping and returns metrics all provide opportunities for CLTV improvement. 

At this stage, it’s important to do whatever it takes to retain a customer or get a 5-star review. One way to increase repeat purchase is to offer a loyalty or reward program to encourage redemption and continued engagement. According to a case study by Smile.io, Death Wish Coffee was able to achieve a 4.8x higher AOV for repeat customers vs one-time shoppers, and a 2.6x higher purchase frequency for loyalty program members. 

Reaching Maturity: Scaling Customer Loyalty and Brand Advocacy

Once established brands are scaling sustainably and hitting maturity levels, the game changes again. Mature brands are well-known, have high market share and revenues, and have long standing history or reputation in their respective industries.

Mature brands that easily come to mind include Apple, Macys, Nike, or Toyota. 

One of the ways to increase CLTV is to get customers to buy product extensions, new products, and other easy add-ons. 

For example, an apparel brand that started with a few key items, can at this stage have hundreds of SKUs and various product lines, sizes, and colors. Additionally, once large enough, an enterprise will need to think about ways to increase productivity and affect CLTV by innovating versus their competitors. 

Those that embrace technology, new features and functionality in their stores and online, and provide community building and concierge options, will see improvement to their bottom line and CLTV. 

Big businesses like Amazon have created such high-value membership programs like Prime, that half of US households have at least one Prime account. According to recent stats, Amazon Prime members spend over 2X non-Prime members. They’ve accomplished these milestones by investing in a robust logistics and delivery network, fast shipping, technology and customer centricity. Amazon has proven itself as a company that understands what drives long term customer lifetime value and they methodically tackle it through business strategy and execution. 

The CLTV Landscape: Considerations and Challenges

Improving CLTV at Each Stage

Seed

• Prioritize high-quality customer acquisition with a strong content testing strategy to test-and-learn quickly. 
• Identify the best marketing channels for your brand and industry, using ROAS, CTR, and CVR as benchmarks.
• Leverage personalized communications via email and SMS to send tailored messages at the right time for the right customer, with relevant content. 
• Gather as much data and customer insights as possible to inform decisions. 

Growth

• Optimize conversion rate and UX, creating a frictionless digital storefront through experimentation. 
• Prioritize customer retention and advocacy, consider exploring a loyalty program. 
• Unlock CLTV potential with data analytics and find white space opportunities.
• Invest in best-in-class customer service and internal tools to improve processes and customer satisfaction.  

Mature

• Produce product extensions, new categories, and add-ons in order to build CLTV from a merchandising perspective. 
• Invest in technology and innovation by enhancing in-store and digital experiences, personalizing the customer journey, and improving infrastructure. 
• Build a strong community of brand ambassadors and influencers while providing them with exclusive benefits.
• Overall focus on customer centricity by creating social listening capabilities and proactively improving things like flexible payments, fast delivery, etc. 

Additional Considerations 

Some additional considerations about CLTV include understanding that benchmarks vary based on industry, size of brand, and type of business. There are many industry-specific factors that will influence what healthy performance looks like, especially if it’s B2B vs B2C. 

One major distinction exists with subscription models, where a much larger focus is put on retention tactics and how to keep customers subscribing over time. 

Many brands will create cohort-based reports to capture customer behavior by time period and see how each behaves over time. In subscription businesses, the churn rate is key to optimize, and brands try their best to keep customers subscribed. They can benefit from giving customers control of their plan, while trying to personalize retention strategies. For example, setting up multi-branch cancel flows to learn why users are canceling, then offer specific promos and incentives in exchange for staying subscribed. 

Some proactive measures include the ability to skip a shipment cycle, reschedule or change delivery frequency, or swap products to align with customer preferences. The longer you keep a subscriber, the higher you can push your CLTV. 

CLTV Challenges at Each Stage

Seed

• Limited data and resources causes brands to prioritize and consider opportunity cost for what to pursue. 
• Product-market fit uncertainty and balancing between creating a great product vs going to market faster. 
• Competition can create difficulties with customer acquisition and standing out. 

Growth

• Growing pains come with fast scale, creating challenges for operations, logistics and customer service teams. 
• Customer churn can seriously impact CLTV, meaning a stronger focus on retention in addition to growing new customers. 
• Acquisition costs tend to increase, which means finding other levers like AOV become more important. 

Mature

• Legacy systems might cause larger organizations to be inefficient with internal processes and create an inability to take quick and decisive action. 
• Complacency and challenges with innovation can stop a company from adapting to new market conditions or catching up with competitors. 
• Customer loyalty can be tough to maintain with new entrants or products in the marketplace or even saturation overall in the particular industry.  

Additional Challenges

There are additional things that can negatively impact your CLTV - some are in your control, and others are external factors. 

For example, new or old competitors could launch a new product or marketing campaign that takes market share from your brand and causes customers to switch. Reviews and social proof are important to drive trust, especially for smaller brands, so monitoring that is crucial - usually the most vocal customers are those that love you or who’ve had a negative experience. Seeking those out and getting ahead of negative reviews can save headache later and keep a good reputation in check. 

It’s good to take a holistic approach to CLTV management, understanding that there are many factors to keep on top of. Even a poor customer service interaction or product issue that leads to high returns can cause friction for consumers and impact your CLTV negatively.    

The Future of DTC is Customer-Centric

Brands that keep CLTV in focus will achieve higher levels of profitability and provide better customer experiences. 

The key points to recap are: Focus on different tactics at each stage of growth, keep customers and data at the center of decision making, and prioritize a test and learn mindset to maximize CLTV across all marketing channels. 

To accomplish this, try the following: 

• Evaluate what stage your business operates in and tailor your strategy accordingly.
• Conduct qualitative and quantitative research and in-depth analysis of your customer.
• Depending on your team's size, consider hiring an expert fractional resource through an agency like Right Side Up, to focus on marketing and conversion optimization.
• Invest in your technology and website features that improve the user experience. 

By utilizing these strategies you can unlock opportunities, maximize your brands potential, and drive long term CLTV success. 

‍Are you ready to boost CLTV and make lifelong customers? A growth marketer or an email/SMS marketing expert may be the next fractional specialist your team needs to boost this increasingly important metric.

Click here to learn about the premium marketing talent we work with and to speak with our team to hear more about the capabilities a fractional marketing expert can bring to your organization.