How can you use customer lifetime value to prioritize cross-selling and upselling?

1 What is CLV and why does it matter?

CLV is the present value of all the future cash flows that a customer will generate for your business. It reflects how much a customer is worth to you, based on their purchase history, loyalty, retention, and profitability. CLV matters because it helps you identify your most valuable customers, allocate your resources more efficiently, and optimize your marketing and sales strategies. By knowing your customers' CLV, you can segment them into different groups and tailor your cross-selling and upselling offers accordingly.

2 How to calculate CLV

There are different ways to calculate CLV, depending on the data and assumptions you have. One simple formula is to multiply the average order value (AOV) by the average purchase frequency (APF) by the average customer lifespan (ACL). For example, if your customer spends $50 on average per order, buys from you four times a year, and stays with you for three years, their CLV is $50 x 4 x 3 = $600. However, this formula does not account for the time value of money, the cost of acquiring and retaining customers, or the variability of customer behavior. Therefore, you may want to use more sophisticated methods, such as cohort analysis, predictive modeling, or machine learning, to estimate CLV more accurately.

3 How to use CLV to prioritize cross-selling and upselling

Once you have calculated CLV for your customers, you can use it to prioritize cross-selling and upselling opportunities. Cross-selling is when you offer a complementary product or service to a customer who has already bought something from you. Upselling is when you persuade a customer to buy a more expensive or premium version of what they are buying. Both strategies aim to increase the customer's basket size and satisfaction, as well as your revenue and profit margin. However, not all customers are equally receptive to cross-selling and upselling, so you need to consider their CLV when making these offers.

4 How to segment customers by CLV

A common way to segment customers by CLV is to use the RFM model, which stands for recency, frequency, and monetary value. Recency measures how recently a customer has bought from you, frequency measures how often they buy from you, and monetary value measures how much they spend with you. By combining these three factors, you can assign each customer a score that reflects their CLV. For example, you can use a scale of 1 to 5 for each factor, and then add them up to get a total score between 3 and 15. The higher the score, the higher the CLV.

5 How to target customers by CLV

Based on the RFM score, you can divide your customers into different segments and target them with different cross-selling and upselling offers. For instance, Champions, who have high scores in all three factors, are loyal, frequent, and high-spending buyers likely to respond well to exclusive deals, personalized recommendations, and loyalty rewards. Loyal customers, who have high frequency scores but lower recency and monetary value scores, can be incentivized with discounts, bundles, and free shipping. Potential loyalists, who have high recency and monetary value scores but lower frequency scores, can be offered upsells, cross-sells, and referrals. New customers with high recency scores but low frequency and monetary value scores can be nurtured with welcome offers, free trials, and educational content. At-risk customers with low recency scores but high frequency and monetary value scores can be re-engaged with win-back offers, surveys, and feedback requests. Lastly, Lost customers with low scores in all three factors can be won back with reactivation offers, testimonials, and case studies.

6 How to deliver cross-selling and upselling offers

The final step is to deliver your cross-selling and upselling offers in a way that is relevant, timely, and valuable for your customers. You can use different channels and methods to reach them, such as email, phone, chat, social media, or website. However, regardless of the channel or method you use, you should focus on the customer's needs and goals and provide clear value propositions. Additionally, use social proof, testimonials, ratings, and reviews to show how other customers have benefited from your offer. Create a sense of urgency or exclusivity by using deadlines or special offers to motivate customers to act quickly. Lastly, make it easy and convenient for them to accept your offer by providing clear instructions and payment options. With CLV as a powerful tool to prioritize cross-selling and upselling, you can increase revenue and customer loyalty while delivering value and satisfaction. Try it out and see how it can improve your results!

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?