You’ve probably heard the term customer lifetime value (CLV) before, but do you really know what impact it has on your business? Without going into too much detail, your CLV is the total value that a customer is worth to your business over time. It takes into account how frequently they purchase, how much they spend, and how long they remain your customer.

Increasing this value can have a significant impact on the success of your business. Implementing a rewards program is a proven way to increase all three aspects of the CLV calculation.

Why Is a Rewards Program Necessary to Increase CLV?

1. Earning Points Turns One-Time Customers into Loyal Ones

Rewarding a customer with points is a great way to extend their lifetime with your store.  A customer who receives 100 points for the $10 they just spent at your store will be more likely to purchase again in the future than a customer who doesn’t.

This is the principle that makes programs like Starbucks Rewards so effective. Positively reinforcing actions like making a purchase or referring friends will increase that behavior in the future because customers always want more value. That means that the value you’re delivering needs to be catered to your customers. 

Understanding who your customers are will allow you to design a program that offers the right selection of rewards that motivates your customers to shop with you more often. Providing this motivation is the key to increasing your customer lifespan and how much they spend at your store.

With a rewards program in place, customers perceive your store to offer more value for their money. Since the rewards they are redeeming with their points usually have monetary value (i.e. free shipping, free product, or discount coupon), it’s easy to associate a purchase with this value.

By rewarding your customers for actions you want to encourage, you can increase the likelihood that they will come back to purchase from you again. If they know they can turn their points into something like a discount for a future purchase or free shipping, they’re going to be encouraged to keep performing actions that move them closer to that goal.  

2. Reward Programs Create a Switching Cost

When your customers earn points with a rewards program, they have more incentive to stay with your brand because leaving would mean sacrificing the value those points represent.  This barrier is called a “switching cost”, and this switching cost can mean the difference between customers staying with your brand or shopping with a competitor.

Since a rewards program has the ability to prevent your customers from flocking to the competition, this has a profound impact on your customer lifetime value. The time that someone remains your customer is equally as important as their average cart size or how frequently they purchase from you.

Once a customer makes a purchase and accumulates some points, it’s hard to let those go to waste because of a theory known as loss aversion. This theory states that humans prefer to avoid losses rather than acquire equivalent gains.  

In the context of a rewards program, then, the points your customers have earned become a loss they’re simply not willing to give up.  Since these points can be redeemed for discounts or free shipping, it’s tougher to let them go because they have a concrete financial value, motivating your customers to continue shopping with your store in order to keep that value in their pocket.  That means a higher CLV for your business and more amazing rewards for your customers.

3. An Effective Rewards Program Encourages Referrals

Referrals are extremely effective because they are one of the most authentic forms of marketing; a friend’s review of a company is much more genuine than an advertisement. You need to reward referrals so your brand superstars continue to recommend your store to others.

Although referrals aren’t explicitly tied to customer lifetime value, the additional revenue from each new customer can be traced back to the original referrer. This means that customers referring friends who make purchases have greater value than a regular customer and should be rewarded for it!

One of the most effective tactics we’ve seen to increase referrals is to reward both the original customer and their friend once the referral makes their first purchase. This reward can be something such as a discount on next purchase or free shipping!

Enforcing this behavior will motivate the referrer to keep bringing new customers to your store. As a bonus, they will continue shopping at your store with their referral incentives, once again increasing their lifetime value and your brand’s ongoing success.

Stop Ignoring Your CLV and Increase it With a Rewards Program

If you are currently ignoring your CLV, then you might have a customer retention problem or high acquisition cost hiding in your numbers. Implementing a rewards program allows you to create loyal customers, incentivize people to refer their friends, and discourage customers from switching to competitors – all strategies that will increase customer lifetime value in the long run and give you more bang for your marketing buck.