Little did Darwin know that his famous “survival of the fittest” theory would someday refer to the Retail Industry.

Similar to the mechanism of natural selection, the Retail Arena is quickly becoming one of the fastest, most unpredictable, and most competitive business landscapes. 

eComm Giants such as Amazon, brick-and-mortar stores, and niched online outlets are all fighting over the same customer base’s eyes (and wallets). 

In this context, profitability becomes your prime challenge and the main threat to your survival.

What Does Profitability Mean in 2023?

The profit margin in a retail business is often explained as balancing price and volume—selling the right products at the right price

However, in this current landscape, the equation is far too simplistic. 

The key to sustained profitability lies not merely in what customers buy or how much they spend. 

Instead, the key to profitability is understanding the underlying factors that drive purchasing decisions. 

Profitability is closely linked to customer demand.

With so many competitors around the corner waiting for you to slip off, your mindset has to change.

You should move on – from solely focusing on product or pricing to an in-depth understanding of your customers. 

Knowing your customers is the path to driving profitability, enabling you to tailor your products, services, and customer-focused marketing efforts to meet and anticipate customers’ needs. 

The path to profitability in retail is paved with a customer-centric approach.

Today’s post examines how retailers like yourself can navigate this path by embracing the Customer Lifetime Value (CLV) concept. We’ll also make the case and provide the steps to shifting your organizational focus towards enhancing the customer experience.

Acknowledging Customer Lifetime Value (CLV) as a Key Profit Metric

In the context of the competitive landscape we’ve outlined, it’s clear that achieving sustained profitability is a formidable challenge.

The challenge only becomes more potent when you also consider the following:

  • the thin margins in the retail industry
  • the increasing customer acquisition costs
  • the complexities of managing a multi-channel retail strategy

We aren’t entirely dismissing the traditional methods for improving the gross profit margin—increasing sales revenue or improving operational efficiency. 

However, you must admit these methods aren’t enough in the dynamic retail environment. 

Furthermore, once the bedrock of retail profitability, customer loyalty is harder to achieve. 

The abundance of options means consumers can easily switch to competitors if their expectations are unmet.

In the face of these challenges, the path to profitability in retail requires a strategic shift – and Customer Lifetime Value is the metric to facilitate the change.

CLV measures the total value a customer brings to a business over their entire relationship.

Unlike simplistic metrics (such as the AOV or the COGS), CLV considers the potential for repeat purchases, upselling, and cross-selling opportunities for your customers. 

In essence, measuring CLV provides a holistic view of a customer’s value and helps you make data-driven decisions to enhance customer experiences and drive profitability.

The CLV allows you to find your most valuable customers and orchestrate your strategies to extract the most value from these consumers while building long-term loyalty. 

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Moreover, it helps you channel your resources into customer acquisition and retention efforts that yield the highest return on investment. 

Lastly, CLV reveals insights into customer behavior and preferences, enabling personalized marketing campaigns and improved customer experiences.

Discussion between CFO and CMO to Agree on a CLV-Focused Model

While any employee can ignite meaningful organizational change, the leaders’ mindset and behaviors will implement long-lasting culture shifts.

Seeing how change comes from the top, choosing CLV as a North-Star metric requires a collaborative effort between the Chief Financial Officer (CFO) and the Chief Marketing Officer (CMO): 

→The CFO brings financial awareness to the table, analyzing the financial implications of CLV and its impact on revenue and profitability. 

→Conversely, the CMO possesses deep customer insights and understands how CLV can be leveraged to drive marketing initiatives and customer engagement. 

The two can agree on a CLV-focused business model through open and constructive discussions.

If you’re in the C-Level team, be aware you might have to compromise and be flexible in the CLV negotiation. The end result should bring together financial and customer perspectives, ensuring a comprehensive approach to profitability.

Role of the Data Team in Supporting the CLV Model

Any effective CLV model has its foundation in accurate and comprehensive data, so you must bring the data team on board when implementing a CLV approach.  

Data people collect, clean, and analyze customer data to calculate CLV accurately. They work closely with various departments, including finance, marketing, and customer service.

While the data team is ultimately responsible for gathering the necessary data points and delivering meaningful insights, they will need support from the entire company.

In short – the data team will dig deeper into the numbers, but all teams must be ready to share their customer data with this team.

CEO’s Role in Driving CLV

To put it bluntly, CLV is the CEO’s metric

Yes, all departments (not limited to the marketing team) have to work together in perfect harmony, similar to a beehive, to improve the overall CLV. 

It’s a metric affecting everyone: your products, pricing, fulfillment, CX, marketing, customer service, and more.

Yet, the CEO’s understanding of CLV as a holistic, company-wide measure of success is essential for fostering a customer-centric approach throughout the organization.

After all, the CEO is the one who sets the tone and vision for the company

As a CEO, you must acknowledge that CLV goes beyond individual departments or teams. 

It’s about the entire customer journey and experience: pre-, post-purchase, and post-usage. 

At the same time, it involves a customer-centric approach, cross-department alignment, and an overall unified approach in retail.

Since all departments are expected to pitch in to improve this metric, you can infer that CLV is a company-wide metric. And, as a CEO, you are the only one who can inspire a collective effort to prioritize satisfaction and customer loyalty across all touchpoints.

CLV Metrics and Company-Wide Communication

Imagine you’re training a football team in danger of being retrograded to a minor league. 

You’re doing everything you can to get your players to run faster, pass to each other, and keep their eyes on the ball.

Yet, your team isn’t doing so well. And the real issue? 

Your players don’t even understand how dangerous the situation is. 

They think each pass scores them a point, so they aren’t even worried about the goals and the goalkeeper. 

You can’t bring them to see your POV, they aren’t improving, and your whole career is on the line. 

It’s the same in eCommerce. 

CLV is the ultimate metric holding the scorecard for your business.

Yet, to raise your CLV, you need a variety of metrics related to retention, purchase frequency, average order value, and gross margin. 

It’s like building a house – after departmental integration, as each metric improves, it acts like a brick, elevating the entire business.

So, when it comes to targets, the CEO must collaborate with the leadership team to pick ambitious yet realistic goals. 

Setting and communicating clear CLV targets creates a tangible goal for the entire company to strive towards.

Customer Research for Profitability

While the C-execs ignite the CLV approach, the Customer Success department should have a valuable point regarding customer experience optimization. 

Where do you start as a Customer Success professional? 

You start with the research stage. 

Profitability only comes after you identify and understand your most valuable customers – the soulmates, as we call them in the RFM analysis.

Not only are these people generating the more significant part of your revenue, but they also have the greatest potential for repeat purchases and long-term loyalty. 

Dive even further into understanding your Ideal Customer Profile (ICP)! Check out this in-depth article to learn how to find and use the ICP in your acquisition & retention campaigns!

It goes without saying that taking care of these people drives customer satisfaction, increases retention, and maximizes profitability.

However, you must understand that getting to know these customers must go beyond basic demographic information. 

You must deeply dive into their preferences, motivations, and pain points

Similar to a romantic relationship, you can’t build a life with a stranger. 

You won’t marry the first beautiful person who tells you their name (hopefully.)

Instead, you would want to know this person inside and out – flaws and all. 

It’s the same with your best customers.

You have to uncover the reasons driving their purchasing decisions and retention. 

What keeps them coming back?

Research Methodologies to Understand Buying Behavior and Improve the Customer Journey

Best-in-class companies employ these effective research methodologies to explore customers’ buying behavior and their interactions with the brand.

  • Surveys and interviews

Directly engaging customers is simple and effective – yet only some businesses take the time to do it.

These methods provide valuable firsthand information and allow for probing deeper into customers’ thoughts and emotions.

It’s a simple way to understand what goes into your customers’ minds, then use that info to improve your business processes.

  • Data analysis

Leveraging customer data empowers you to uncover patterns and trends that provide quantitative insights into buying behavior. 

Analyze purchase history, browsing habits, and interactions to get an objective and statistical view of customer behavior.

  • The Jobs-to-be-Done methodology

When it comes to understanding your customers and boosting your business, the JTBD methodology is a game-changer. 

It starts from the hypothesis that customers don’t buy products; they “hire” products to progress in their lives

Unlike other research techniques, the JTBD uncovers what your customers genuinely want to achieve, the hurdles they encounter, the situations that drive their purchase decisions, and even the early warning signs of customer churn. 

It’s a powerful approach that puts you in the driver’s seat.

Brainstorming a Cohesive Customer Journey

The customers’ journey isn’t a one-person job. Involve your teams’ collective knowledge and creativity to create holistic, meaningful, and profitable retail strategies.

Maximizing profits in retail starts by mapping out the entire customer journey and identifying each touchpoint along the way. 

Consider department collaboration to include all customer interactions. This way, you won’t leave out any online interactions, such as browsing a website, or offline experiences – like visiting a physical store or contacting customer service.

Then, invite team members to share their insights and observations from their respective areas of expertise. 

For example, the marketing team may bring insights into customer preferences, while the CX teams could weigh in on common pain points.

Remember to check all insights with your insight coming from customers. There’s little use in tweaking your website or marketing messages if you don’t deliver what customers want.

Once you find potential areas for improvement, discuss the concrete steps to enhance the customer journey. 

Remember to discuss personalization throughout the customer journey. You didn’t conduct all that research for nothing, did you?

Brainstorming sessions should not be one-time events. 

Foster a culture of continuous improvement by scheduling regular sessions to revisit the customer journey and discuss ongoing optimizations. This iterative approach allows you to adapt to changing customer expectations and market trends.

Need to know more? Check out this introductory article into the CLV world and discover why it’s your best bet for sustainable and achievable growth!

Setting Quarterly Initiatives and Measuring Their Impact

Some ideas you generated in the brainstorming sessions will become concrete initiatives involving various departments within your organization.

Here’s how departments can contribute their unique expertise and perspective to drive customer value and profitability:

Marketing oversees initiatives that focus on acquisition, retention, and customer engagement.

They leverage customer insights to orchestrate personalized marketing campaigns, promotions, and loyalty programs. 

Using a combination of content composition trends and customer needs, marketing departments should aim to create processes that resonate with the target audience and drive customer loyalty.

On the other hand, the operations department should facilitate the smooth execution of customer-centric initiatives and keep the operating profit margin in check. 

They focus on optimizing processes, streamlining supply chains, and improving logistics to enhance the overall customer experience while lowering operating expenses.

Initiatives from the operations team involve implementing efficient inventory management systems, reducing delivery times, or enhancing customer service capabilities.

How These Initiatives Impact CLV and Overall Profitability

First off, your initiatives are all about attracting and keeping customers while maximizing their value. 

It’s about acquiring better customers, making them return for more, and even convincing them to spend more on each purchase. 

Done right, a customer-centric approach builds a strong relationship, leading to higher CLV over time.

But it’s not just about your customers. 

Quarterly initiatives also focus on making processes more efficient and cost-effective behind the scenes

What happens when you examine your internal processes?

You remove the clutter.

When mapping the customer journey and analyzing how you’re orchestrating it, you’ll find areas to improve and streamline.

This helps cut costs and increases profit margins, ultimately boosting overall profitability.

Of course, customer experience is a big priority too. 

Businesses invest in technology, easy-to-use interfaces, and responsive customer support to make shopping a breeze. When customers have a smooth and enjoyable experience, they’re more satisfied and become loyal advocates for the brand. 

And that, in turn, leads to higher revenues and greater profitability.

Monitoring and Reporting on Performance

CLV, as an average metric, isn’t really worth much. But measuring CLV across factors like location, product category, and customer segment? 

Priceless. 

Be prepared to keep tabs on variations and use them to increase profits.

Let’s start with the location. 

CLV can go through the roof in certain areas. 

By tracking CLV by location, you can pinpoint those golden regions where customers have a stranger purchasing power and can spend more with your brand. 

Once identified, go all-in on targeting and engaging those areas with killer marketing campaigns and top-notch delivery options.

Next up – the product category. 

Some categories bring in most of your revenue, while others barely make a dime. By analyzing CLV variations by type, you’ll know which categories are most popular with your customer bases. 

Shift your focus and resource allocation to those high CLV categories: get the right products on the shelves, create an irresistible price point, and push them in your acquisition and retargeting campaigns. 

Last but not least customer segment. 

Different customer groups have different spending patterns. Pay close attention to CLV variations by segment. 

This helps you identify your most valuable customers and treat them like royalty. 

Besides serving them personalized offers or targeted marketing campaigns, focus on making their experience with your brand unforgettable. Prioritize their tickets, offer tokens of appreciation, and ask for & implement their feedback.

It’s all about keeping those high CLV segments coming back for more.

The Role of Internal Reports in Monitoring Performance

If you already applied everything you’ve read until now, congratulations are in order.

Yet, you have to showcase your work. 

What about the results?

Wait, did something go wrong and get out of hand, causing long-lasting consequences?

You will need internal reports to document, evaluate, and improve your work.

One key aspect of these reports is focusing on customer-centric metrics such as customer acquisition, retention, and satisfaction. 

Keep a close eye on these KPIs and assess the effectiveness of your initiatives. Use the internal reports as you’d use a compass. Let them point in the right direction to achieve customer success and improve profitability. 

Internal reports also provide actionable insights to guide decision-making and improve performance. 

They represent the key to staying agile and responsive in the ever-changing world of eComm & Retail. 

Closely monitoring performance empowers you to proactively address challenges, optimize strategies, and drive profitability through a customer-centric lens.

It’s how you stay in the game, ensuring you’re always one step ahead of your competition.

Refining Based on Customer Feedback and Data

We’re almost but not quite over, as there’s a final step we need to discuss: refinement

(Yes, implementing a customer-centric approach and choosing CLV as a North-Star metric is quite a lengthy process.)

Staying profitable requires constant fine-tuning of strategies based on customer feedback and data. 

Customer feedback is your gold, so don’t lose sight of surveys, reviews, and social media as valuable channels for gaining customer insights. 

Your other secret weapon is data analysis, providing insights into customer behavior, market trends, and business performance. 

Use customer feedback to optimize pricing strategies, refine product assortments, and personalize the customer experience

Iteration and Continuous Improvement

There’s no way around it; the “secret” to success lies in iteratively improving the customer journey.

This involves constantly fine-tuning touchpoints, addressing pain points, and providing a consistent and exceptional experience across all channels.

Tl;dr – ask customers if they like the new you. 

They do? Excellent, keep at it.

Don’t they? Then stop annoying them, listen to what they want, and deliver it.

Wrap Up

Like in nature, where the fittest organisms thrive and adapt to their environment, the retail arena demands constant adaptation and innovation for businesses to survive and thrive.

Don’t become another victim of high competition and high-maintenance customers. 

Instead, seize the reins and adopt an unwaveringly customer-centric approach

Your path to profitability is forged by tailored products, services, and marketing efforts that meet and anticipate customers’ ever-evolving needs. Use CLV as a crucial tool in assessing the long-term value of each customer and making the best decisions to enhance their experience.

Good luck pursuing customer-centricity and achieving retail success through collaboration—and see you on the other side!