Using Customer Reviews to Increase Revenue
There are two ways to increase revenue. The first one is to acquire new customers. The second is to retain and serve the existing customers and increase their lifetime value (CLV). Data reveals that most companies focus on acquisition more than customer retention even though it can cost 7x more to acquire new customers.(2)
Customer Lifetime Value (CLV), one of the most important marketing metrics, has been consistently undervalued by the majority of the companies. A study in the UK found that only 34% of surveyed marketers were “completely aware of the term and its connotation”, while only 24% of the marketers felt that their company’s CLV was being monitored effectively.(3)
The top 1% of your customers spend 30 times more than your average customers.(1) That's why to drive your business growth, you must focus on creating loyal customers with high lifetime values.
How to Make CLV Your Business Priority
Growing CLV doesn't have to be complicated. One of many ways to do it is through customer reviews. Research shows that 24% of American adults have posted comments or reviews online about the product or services they buy. Not only that but 90% of people indicate that reviews play a big part in their buying decision.(4)
Understanding your customers by collecting reviews allows you to focus on the aspects of your business that fuel customer satisfaction and learn how to improve it.
High review scores (positive feedback) help you increase your CLV since happy customers are far more likely to stay with your business than unsatisfied ones. But before we dive deep into the correlation between customer review scores and their impact on CLV, let's talk about what CLV really is.
What Is CLV?
Simply stated, CLV is the expected profit you get from each customer over the full "lifespan" of a business relationship.
For example, a regular customer who buys your products monthly will have a much higher lifetime value than someone who buys your product on a yearly basis. Estimating a customer’s lifetime value can help businesses make key marketing decisions concerning budget allocation, customer acquisition, retainment cost, customer loyalty, etc.
A Method for Calculating CLV
CLV can be conveyed in a detailed or more general formula. You'll need information such as the average purchase price, the average purchase frequency, and the average length of time (also known as lifespan) customers shop at your business to make the calculation. Many businesses opt for one year as their timeframe, since it can be difficult to find out how long someone will really be a customer. Focus on a shorter timeframe and make your decisions for that time.
The most basic way to calculate CLV is as follows:
CLV = (Average Purchase Value – Average Purchase Frequency) * Average Customer Lifespan
To find the average purchase value, divide your business’s total revenue during the time period by the number of purchases:
Average Purchase Value = Total Revenue / # of Purchases
To calculate your average purchase frequency, divide the total number of purchases in a period by the number of unique customers:
Average Purchase Frequency = # of Purchases / Unique Customers
Lastly, find your average customer lifespan by determining how long customers stay with your business. Use past metrics to calculate average customer lifespan:
Average Customer Lifespan = Customer Lifespan Total/# of Customers Used in Equation
How & Why Businesses Should Receive Customer Reviews
We are living in an internet-centric world where consumers are more connected than ever. The value of influence associated with a consumer’s review has a huge impact on a business’ profitability and credibility.
There are two types of reviews, first-party reviews and third-party reviews. The former are collected and presented on a business's website while the latter are collected and presented on third-party websites such as Trustpilot and Feefo or social media profiles such as Google and Facebook.
It's crucial that businesses actively seek and manage both first and third party reviews to stay ahead of the competition. Reviews will not only help generate trust but they will help to increase sales as well.
A study showed that customers are likely to spend 31% more on a business with excellent reviews.(5)
Beyond driving purchases, customer reviews (especially on third-party platforms) have the power to drive up search engine results and provide assurance that posted reviews were gathered from actual customers, which increases the business's level of trustworthiness.
Businesses can actively seek out reviews by just asking the customers in person during the sale, in an email, over the phone, or in an SMS message. From these methods, the most effective way to generate reviews is sending post purchase emails to consumers, asking them to write reviews for recently purchased products. According to a survey conducted by Brightocal, of the 74% of customers who were asked to provide feedback, 68% were willing to do it.(6)
So don't wait to start gathering reviews. Start today!