Increasing profitability with Customer Value Optimization (CVO)

Are you looking for a better way to do marketing? Does "creating and optimizing value" sound like music to your ears? Then Customer Value Optimization (CVO) is definitely a method worth diving into. By leveraging CVO, you can ultimately increase your company's profitability. However, it's not an easy task—CVO is no piece of cake. This article will help you understand and apply CVO so you can maximize its benefits for your business. After reading this article, you'll believe in the magic of CVO too. Customer Value Optimization is all about optimizing the value FOR and FROM your customers.

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Today's Challenge

Are rising marketing costs one of your biggest challenges nowadays? It’s understandable—marketing costs have been rising for years, and tracking and targeting potential customers has become more difficult than ever (iOS updates, laws, and regulations). In addition, competition is increasing, and consumer buying behavior is constantly changing. This means that the “tricks” you used in the past probably don’t work anymore. Spending more money on marketing won’t solve the problem.

So, what can you do? How can you grow the profitability of your business?
To find the answer, it’s wise to look at the companies that are best in class. What stands out? Most of these companies don’t focus on short-term profit (profit, not revenue). No, these businesses heavily focus on the lifetime value of their customers. There’s a lot to learn from this. It shows that for sustainable growth, you need a different approach—a smarter approach. And when you think smart, Customer Value Optimization comes into play.

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What is Customer Value Optimization?

Okay, so what exactly is Customer Value Optimization (CVO)?
CVO is a methodology designed to create a great customer journey and maximize the Return on Investment (ROI) for all marketing activities. The method focuses on optimizing the entire customer lifecycle to improve brand loyalty—and create lifelong customers.

CVO helps you better understand your customers and identify gaps in their journey. This allows you to fill those gaps and enhance the lifetime value for and from a customer. By doing so, you also improve your company’s profitability. Sounds good, right?

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Profit and Margin (Not Revenue)

When you start as an (email) marketer with Klaviyo, you immediately see how much revenue you can generate from email. This is, of course, amazing and gives you instant insight into the effectiveness of your efforts. You might give away some discount codes and see sales rise even further.

These sales are fantastic in the short term, but do they help your company’s profitability in the long run? And do they help retain customers over a longer period?

If you are already using paid marketing channels, you know that you need to invest upfront before securing a purchase. In most cases, when you factor in all the costs, it means you need at least two purchases to make a profit. An example of this is shown below.

The image above illustrates that revenue alone doesn't provide a clear picture of your company’s profitability. That revenue has to cover all costs (as shown below), which will hopefully result in profit. This is why profit is a much better metric. But how do you increase that profit? By retaining customers longer. A customer who buys from you twice or even three times is more profitable than three separate customers who each buy only once.

Did you know that by increasing your Customer Lifetime Value (CLV) by just 5%, you can boost your company’s profitability by 25% to 95%? (Source: Harvard Business School)

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Customer Value Optimization (CVO)

Focusing on increasing Customer Lifetime Value is clearly a smart strategy. But what does it actually mean? Simply put, it involves not just focusing on one sale, but on increasing the Customer Lifetime Value. The best way to achieve this is through Customer Value Optimization (CVO).

In essence, CVO is about putting the customer at the center. To do that, you need to better understand your customer. It’s crucial to know who your best customers are and what their needs are. Additionally, it’s important to understand how your best customers differ from your "worst" customers. For instance, your worst customers might be those who purchase once, repeatedly return items, and submit multiple support tickets—customers who are not exactly desirable.

Once you better understand your best customers, you can communicate with them more effectively. You can speak their “language,” address the problems they face, and ultimately provide much better service. The goal is to truly understand your customer so that you know their motivations, why they buy from you, the problems you solve for them, as well as the promises you’re making (through marketing or product pages) and whether you're delivering on those promises.
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CVO and Klaviyo

Now that you know what CVO is, you should understand the CVO methodology before getting started. First of all, CVO is a process, similar to most other process cycles like Build, Measure, Learn, PDCA, or the Double Diamond framework. The CVO process involves the following steps:

1. Begin with research (both qualitative and quantitative) to identify the key issues that impact Customer Lifetime Value.
2. Brainstorm ideas based on the insights gained from your research to come up with improvements.
3. Implement or test these improvements.

During the research phase (both qualitative and quantitative), you'll work on things like RFM analysis, NPS, surveys, Jobs to be Done (JTBD) interviews, and dive into data to understand what positively and negatively influences RFM. Below, I'll share some insights into these studies.

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RFM Analysis

You might be wondering what RFM stands for. RFM stands for Recency, Frequency, and Monetary Value. These are metrics used to score your customers (with 1 being the worst and 5 being the best). Using these scores, you can segment customers based on their behavior. Here’s what you’ll evaluate:

• Recency: How recently has the customer made a purchase?
• Frequency: How often has the customer purchased items?
• Monetary Value: How much has the customer spent?

Assigning scores looks like this:

• If a customer purchased an item today, you’d give Recency a score of 5. If their last purchase was over a year ago, you might give them a 1 for Recency.
• For Frequency, you would base the score on the number of purchases. A customer who bought more than 10 items (depending on your customer base) would get a score of 5, while a customer with just one purchase would get a 1.
• The same goes for Monetary Value.
  
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Example

The explanation above means that an RFM segment with a score of 555 represents your best customers, while an RFM segment with a score of 111 represents your worst customers. When you conduct this analysis (Polaris Growth uses a tool called Reveal), you’ll get a clear overview of your customer base distribution. This helps you understand which customers to interview and what to focus on during the interviews.

Reveal, for instance, assigns names to different customer groups. The best customers are called “soulmates.” Customers who place high-value orders are “flirts,” while those whose last purchase was a long time ago are “about to dump you.” Finally, there are inactive customers, whom Reveal calls “breakups.” A full list of these customer group names is shown below.

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Knowing this, you can start thinking about potential email flows to set up. If you’re using Reveal, you’ll have access to many customer profiles and events. This enables you to send automated emails as soon as someone is about to leave your brand (based on the data). For example, by basing your winback flow on this data, you can specifically target customers who are at risk of leaving, rather than sending a winback flow randomly to customers without any foundation.

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Jobs to be Done: Research Interviews

Once you know who your best customers are, it’s time to interview them. This allows you to gather valuable insights from these consumers. Understanding your customers is essential for communicating with them in the right way. The insights you gain help you speak in a way that makes customers feel understood by your brand. Through these interviews, you also discover why customers buy your products. Most importantly, you learn what change they want to experience through your products. Daphne Tidemann puts it this way:

“A Job to be Done is not what your customers buy but rather the change they wish to experience with your product.”

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Example of Jobs to be Done:

Suppose you sell drills. Your customers' goal is to drill holes, but the "Job to be Done" varies for each customer. One customer might want to enhance their home by hanging pictures, while a builder’s “Job to be Done” is to finish their work faster and more efficiently with the same drill.

Combining customer insights with RFM segmentation is a powerful way to ensure that your most important customers receive perfectly tailored messages. You want these messages to resonate with their thoughts. Communicate with your customers by using the words they use. Tell the story that’s already playing in your customers' minds. This is incredibly helpful when creating onboarding flows in Klaviyo. It’s also useful for understanding what questions to ask in pop-ups or emails (for progressive profiling).

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Net Promoter Score (NPS)

Implementing a control system is important to measure improvements over time. Tracking pre-delivery NPS and post-delivery NPS is a great way to start. NPS helps you uncover issues you might not be aware of. Is there something wrong with the pre-delivery experience? Or does the product or service not align with your brand promise?

If such issues arise, it’s smart to resolve them quickly. This is where Gorgias comes in handy. When your best customers give a low NPS score, you want to help them immediately. In Gorgias, you can create tickets for your best customers so your customer service team can proactively reach out and assist them. You can also set up automations for other customers, offering them self-service options so they can resolve issues on their own if possible.

It’s a good idea to implement NPS. Just don’t forget to add follow-up questions for each group. These questions will help you understand the reasons behind the given scores.

It's also worth investigating whether certain elements are causing poor or even churning customers. For example, are there "toxic" products leading to low NPS scores? Are there products that cause high-RFM-score customers to churn? Or are certain regions scoring lower due to delivery issues?

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How does this help with Klaviyo?

There's no denying that discounts help with conversions and sales. But do these discounts also help create better customers? More importantly, do discounts contribute to building a profitable business?

When asking these questions, it's important to remember that revenue isn't the only key metric. It's more valuable to focus on profit and recognize that there are different segments of customers. You can make a big difference for your company (or the company you're helping) by understanding that not all customers in your database are equal.
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1. Getting Started‍

You've now gained a lot of knowledge about CVO. Sometimes it can be challenging to translate this knowledge into action. Don't worry—here are ways to improve your Klaviyo activities:
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2. Send Better Onboarding & Welcome Emails

The key focus here is to be relevant to your customers. The more relevant the content, the better the customer experience. Ultimately, it's about improving the entire customer journey.
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3. Clean Your Klaviyo List

Take your segmentation to the next level by excluding the worst RFM (111) customers. Also, remove customers who have churned and are unlikely to return as subscribers. Once customers hit the lowest RFM level, it's hard to win them back as good customers. Instead, focus on customers who are likely to churn soon. Use insights from surveys and interviews to win them back.
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4. Avoid Discounts for Unprofitable Customers

Is it worth giving discounts to customers who don’t contribute to your business’s profitability? The answer is no. Therefore, it's smart to distinguish clearly between profitable and unprofitable customer groups. This way, you know who to send discounts to and ensure they go only to valuable customers.
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5. Send Post-Delivery NPS Surveys

Once you know that a customer has received and used your product, it's a good idea to send a post-delivery NPS survey. This helps you understand whether the product experience aligns with your brand promise. If not, you'll need to investigate why. But even when the experience is positive, it’s important to explore what went right.
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6. Well-Timed Winback Emails

Once you know the reasons why customers churn, you can craft better winback emails. You'll also be able to time these emails more effectively, considering the RFM recency score.
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7. Align Loyalty Programs with RFM

Knowing your RFM segments is a smart way to tailor and improve your loyalty programs and tiers for specific groups. The top levels of your loyalty program should align with the top RFM groups.
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8. VIP Segments & Flows

The best way to set up VIP flows is by knowing who your best customers are. Using RFM, you can identify your "soulmates." When a customer becomes a "soulmate" in Reveal, it’s wise to show appreciation—perhaps with a personal email or even a gift from the owner. This is a great way to strengthen relationships. Also, think about what you can learn from your best customers. A good question to ask might be, "What more would you like to see from our company?" You can send samples or involve these customers in testing new products to further connect them to your brand.
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9. Referrals

The chance of getting a referral from a "soulmate" is likely higher than from someone in the RFM 111 segment. Test this by offering a few vouchers, increasing your chances of gaining new customers through referrals.

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All in all, Customer Value Optimization (CVO) is an excellent way to analyze and improve the entire customer journey. It allows you to be more relevant to your customers while ultimately increasing the value for and from them. It requires hard work, understanding data, and gaining insights into your customers. But in the end, CVO truly helps make your business more valuable.

Are you interested in CVO but don’t have the time to implement it yourself? Polaris Growth is happy to assist you! Feel free to reach out here to explore the possibilities.