Why increasing customer lifetime value matters for merchants
Keeping customers is more challenging than ever, as consumers today have a seemingly infinite array of choices—both online and offline—over where and how they shop. In fact, various surveys show that brand loyalty has fallen considerably in recent years, especially among younger consumers, who like to shop around and are more likely to switch brands.
This means that creating happy, loyal customers—and deepening those relationships over time—has only gotten more challenging and more critical. Businesses successful at customer retention and building lifetime value (LTV) will ultimately win.
Why should merchants care about LTV?
LTV—how much total monetary value a customer creates throughout their relationship with a merchant—is an increasingly important metric as brands focus on building loyalty. It helps merchants gauge the “stickiness” of their relationships: How much are they spending to acquire customers? How well are they retaining them, driving repeat purchases and growing the total expected revenue generated from each customer?
Maximizing LTV is important because customer acquisition costs have soared and are generally much higher than generating repeat customers. One study found that customer acquisition costs for ecommerce brands rose 222% between 2013 and 2022. Meantime, a Harvard Business Review article says increasing customer retention by just 5% can increase profitability by 25% to 95%.
How can merchants increase customer LTV?
Merchants can increase LTV in various ways. Here are three:
1. Reducing friction and fraud
Creating a seamless and secure buying environment—one that makes it easy for customers to buy what they need while minimizing risk of fraud—will help increase LTV. That’s because fraud—and the costs to deal with it—eat into the bottom line, so reducing it as much as possible helps retain revenue.
Moreover, less fraud generally means fewer false declines, when good cardholders have their card denied unnecessarily upon checkout. That can happen due to fraud models that are too restrictive or that rely on inaccurate or imperfect data about that cardholder’s past transactions.
Preventing false declines is important to increasing LTV because they cause consumers to abandon their shopping cart, often never to return. In fact, recent data shows that 40% of customers won’t buy from a merchant after their first false decline.
So how do you prevent fraud, increase card authorization rates, and, in turn, reduce false declines? Solutions that notify merchants immediately when a customer disputes a charge allow those merchants to take actions that avoid the need for a chargeback—such as stopping and refunding an online order or contacting the customer directly.
This can also improve cardholder authorization rates by ensuring only true fraud-related disputes get coded as fraud and reducing false declines at checkout that may prevent or deter cardholders from using their cards and buying from that merchant again. Improving authorization rates, even by 1%, can have a huge impact on a merchant’s revenue.
2. Decreasing transaction confusion—and chargebacks
Merchants can lose significant revenue from transaction disputes and chargebacks—while potentially losing valuable customers along the way.
While having customer-friendly return and exchange policies can build customer loyalty and prevent chargebacks, tools can also help. For example, providing more insight into your customers’ purchase details, like a clear merchant name and your logo or an itemized digital receipt, in the digital banking channels your customers use to check their card transactions can help reduce transaction confusion by helping to jog their memory of purchases. In effect, putting this purchase information at their fingertips can significantly reduce the risk that they’ll dispute legitimate, nonfraudulent transactions because they do not recognize them.
3. Creating a best-in-class digital experience
Enhancing customer experience has taken on even greater importance as consumers have more choices than ever and more willingness to switch brands. And a poor digital experience is becoming a deal-breaker. A PwC survey found that 51% of consumers would leave a brand if their online experience isn’t as good as their in-person experience.
Merchants can make their digital experience better by giving customers more self-serve options and making purchases—and managing those purchases—easier.
For example, offering subscriptions that allow customers to buy things they want without having to reorder them—and then providing subscription controls through their digital banking apps—is just one way to deliver a better digital experience. A survey by Datos Insights conducted for Ethoca found that the share of consumers interested in a subscription-management tool provided through their digital banking app climbed to 87% in the U.S. in 2023, up from 78% in 2022.
Another way to enhance the digital experience: Providing digital receipts through customers’ digital banking apps. This can reduce transaction confusion that often leads to unnecessary disputes and chargebacks, while also providing customers with merchant contact information in case they have a question or concern.
Digital receipts are growing in popularity and consumers prefer them. Seventy-three percent of consumers surveyed by Ethoca have given their email or phone number to a merchant to receive a digital receipt, while 56% of consumers said they’d be interested in receiving digital receipts through their online or mobile banking apps.1
Source: 1. Datos Insights, Digital Banking and Consumer Clarity: Q4 2023 Survey Findings.
