The Importance Of Customer Lifetime Value

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24th April 2018

How would you like more clients or customers right now?

Would you like another 10… another 100… another 1000?

Now – how would you like to attract those new clients or customers in a way that saves you possibly thousands of pounds in wasted marketing?

… and yes, it absolutely IS possible.

Knowing your Customer Lifetime Value (or LTV) is the key, because it provides you with a better means of understanding what a customer is REALLY worth to your business.

If you can calculate a customer’s true worth, then you can use that information as a marketing tool to strategically plan profitable growth. But understanding the value of a customer to your business is a lot more than just a monetary figure…
It also helps you get to the heart of customer retention, which is one of the key areas that can make a HUGE difference to your business – 5% increase in customer retention equates to approx. 35% increase in profits – but I’ll be covering this in more detail in another post.

One of the problems is, that it is no longer financially viable for the majority of companies to ‘mass market’ their products or services. Over recent years there has been enormous pressure on businesses – especially service organisations – to improve the way they do business with their customers. Many organisations however, overlook the potential of existing customers to develop their business.

It can cost between 5 and 8 times more to attract a new customer than it is to get an existing customer to buy from you again. But unless you take into account the value of a customer to you, over the period of time they keep buying from you, then it can be difficult to understand the real effect that losing a customer has to your profits.

Calculating your own customer lifetime value is usually an eye opener for most people. During the past 20 years I’ve met many business owners and CEOs who don’t have a clue what Customer Lifetime Value is, much less its importance and the impact it has on their bottom line.

It simply means, how much each customer is worth to your business in monetary terms, and therefore how much you should be willing to spend to acquire each NEW customer (as well as how much you should spend to retain existing ones).
The basic formula for calculating your average customer lifetime value is:

(a) The average sale value x (b) number of times your client purchases in a year x (c) the number of years a client stays with you.

This is probably best demonstrated with an example…

(a) The average sale value – This is simply a case of taking your total sales for the year and dividing it by the number of invoices raised. So for example, if my yearly turnover is £225,000 and I invoiced 1,875 invoices in the 12 months, my average transaction value is £120 (225,000 divided by 1,875).

(b) Number of times your client purchases from you in a year – Now lets say on average my clients purchase from me 3 times in a year.

(c) The number of years a client stays with you – Lets assume that I consistently keep my clients for 2 years.

Then the lifetime value of a client to me is 120 x 3 x 2 = £720

Do you only have one customer lifetime value for your business?

Not necessarily…

A Dental Practice might have two, one for general dentistry patients which may equate to a few hundred pounds a year, and one for those who have cosmetic dentistry which may average into the thousands.

A Hair Salon might want to split theirs into two, one for men’s cuts and one for ladies styling, where the difference could be between tens and hundreds of pounds.

A shop or supermarket on the other hand might only have one, if they were only looking at the average transaction at the till, regardless of the products bought.

Here’s an example from one of my clients…

The lady in question runs a successful and profitable business in the Healthcare Industry. Her business is to-all-intents-and-purposes broken down into four distinct types of client.

She was looking to increase business in all four sectors, but before we could start planning her marketing, we had to establish some benchmarks – act as a starting point, but also to serve as a focus to allow us to target more efficiently.

One of the things we did was to calculate the Customer Lifetime Value for EACH of the four client types.

The results were a surprise to her, I can tell you…

It showed that HALF of her business was supporting the other half.

What do I mean by that? I mean that she was LOSING money on two types of client, but making good profit on the other two.

Why is this important?

Because the marketing she HAD been doing was focused around getting more clients in one particular sector – which happened to be one of the ones she was losing money on!

So, what does this mean to her business now? Loads…

We can now focus on the two profitable areas first, but also look at ways we can make the “unprofitable” clients break-even, and then how we can move forwards and make them profitable too.

This situation is not uncommon, and indeed some businesses are actually structured this way with a “loss-leader” product or service because they KNOW they will make their profit from the other products or services they will sell afterwards during the ongoing relationship with the customer.

Now that’s fine as long as you are aware and prepared for it – but if not, knowing could be the difference between surviving or pursuing customers who will actually accelerate the failure of your business.

But even though many business owners DO now realise they need to look at the long-term value of customers, only 29% polled in a recent survey said increasing customer lifetime value was a top marketing objective.

Another advantage of monitoring the lifetime value is that problematic issues, such as a decline in customer purchases or an increase in bad debt, can be spotted quickly and proactively addressed.

And as with the healthcare client example I gave earlier, analysing the lifetime value tells us not only which customers to aggressively pursue but can also give us information about which ones we should consider letting go.

As we shall see in the next post, customer lifetime value is not JUST a number – instead it is a way of thinking and doing business. Managing the customer experience and your customer lifetime value is the key to long-term growth and success.

Do you know the lifetime value of your customers and clients?

If not then finding out this information sooner rather than later, could literally mean the difference between surviving and thriving.

If you would like to share any of your personal experiences, observations or the results you’ve achieved using these or similar tips, please leave your comments and/or thoughts below. I always love to hear from you:

Featured Photo by Volkan Olmez on Unsplash.com

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