Why ‘Customer Lifetime Value’ Matters To Your Business
Here’s a question for you: do you know who your most valuable customers are?
In my experience, companies large and small make the mistake – at great cost to their business – of assuming they know the answer to this. But those assumptions are often outdated, or based on guesswork and instinct.
This can be a dangerous game, and risks undermining not only your marketing investment and sales prospecting but your wider business growth strategy.
After all, how can you decide where to channel your Customer Experience and retention activities if you don’t know which of your customers are the most profitable? How can you target the right prospects to drive future business growth if you don’t have a clear picture of who is making you money right now?
This is why measuring customer profitability – the theme of Week 6 in our 15 Ways to Supercharge your Business series – is so vital for your business.
Some Customer Are More Equal Than Others
Many companies choose to focus on transactional sales figures – in other words, who is spending the most – to pinpoint their most profitable customers, without taking two vital elements into consideration their:
- Long-term value, over their entire customer lifetime
- Cost to your company.
Analysing revenues alone only tells half the story about value; some customers may be high spenders but are more demanding from a customer service point of view, reducing returns and eating into your profitability (and quite possibly resulting in a net loss). Equally, more modest spenders could have cost you very little from the points of view of acquisition and your ongoing relationship, and could be worth their weight in gold.
This is why a better calculation is Customer Lifetime Value (CLV).
Simply put, CLV predicts the profit that you will make from a customer over the entirety of your relationship with them and takes into account costs versus revenue.
What type of costs are we talking about? They span all costs from initial acquisition through to the investment needed to retain the customer, such as marketing communications, post-sales follow-up and servicing. Given that the cost of acquiring new customers is estimated to be anywhere between 5 to 25 times higher than retaining existing ones, the importance of CLV is self-evident.
Of course, your company will have a wealth of information that you can analyse to come up with your CLV calculation, a process which is greatly facilitated if your information is readily available through a smart data management platform such as a CRM.
As a standalone exercise, CLV can be hugely valuable to segment customers into groups by profitability and pinpoint where margins need to be improved in order to drive overall growth. But you can take this one step further – by combining CLV with Buyer Personas.
What Does Your Ideal Customer Look Like?
Using your CLV groupings, you can analyse customer characteristics and create fictional profiles of your ‘ideal’ customers based on the shared traits of your real ones. The following points can guide your analysis, with the data coming from your existing knowledge base, customer surveys or customer account reviews.
- Identity: Demographics such as gender, age and education
- Job role: Data such as title, company size, industry and general responsibilities
- Working life: Their average day, who they deal with, what type of decisions they make
- Typical ‘pain’ points: Their main challenges relating to your products and services
- Values and goals: Locale, price, support, etc.
- Research methods: The primary sources they use in their research and purchase decision process
- Criteria in vendor selection: What is most important; cultural fit, technology leader, proven expertise, availability, etc.
- Common objections: The reasons you hear most often for why your solutions don’t meet their needs.
Next week we’ll ask the question – how can you nurture your most profitable customers so that they stay that way?