Apr 16, 2017
Earlier on our blog, Savavo covered the steps for how to calculate your customer lifetime value. However, why does it really matter? Do you know why successful marketers are familiar with customer lifetime value? It seems like just another number, but it’s not.
Customer lifetime value is the average net profit of the entire future relationship with a customer, based on total past customer revenue minus total past customer costs. Based on past transactions, CLV helps to predict the worth of that customer to your business for the future.
Once you have that calculation on hand, how can customer lifetime value apply to the business decisions you have to make? In fact, there is a long list of marketing decisions and business growth that is built on a firm grasp of CLV.
How much should I spend on customer acquisition?
Cost per lead and customer acquisition is a main focus for many marketers, but make sure you don’t get carried away and forget about customer lifetime value. If the customer acquisition value for a customer exceeds the customer lifetime value for similar customers, you might focus on acquiring customers that will be more profitable for your business. You do not want to lose money in attempting to gain a customer.
Which acquisition channels should I use?
Customers acquired from different channels will oftentimes provide different values for profit over the customer’s lifetime. For example, a customer you gain from an organic search is more likely to develop brand loyalty and offer customer retention than one who reaches your business from a third-party site. Greater customer retention will tend to provide greater customer lifetime value, rather than a single-use customer. By measuring and comparing the CLV of different acquisition channels, you can select which channel will be most profitable in the long-term, rather than just which channel brings in the most initial sales.
How much should I spend on customer retention?
Again, CLV is crucial when understanding what to spend on retaining your customers. As a simplified example, if the cost per year for serving a customer is $50, and the acquisition cost for this customer was $100, how long should you focus on retaining this customer if his or her CLV is $600? After 10 years, should you continue to service this customer, you will be losing money. While this is a prediction for the future, it offers a framework on which to build your profitable marketing plan. On the flip side, when you focus customer retention on profitable customers, “increasing customer retention rates by 5 percent increases profits by 25 percent to 95 percent”.
Which aspect of CLV should I invest more heavily in?
Customer lifetime value can be divided into three factors: average order value, purchase frequency, and customer lifespan. By understanding the factors of CLV, you can know where you should invest your time and money most heavily. If customers have a small average order value, you could try product bundles. If your customers have low customer lifespan, you can focus on customer engagement and growing customer loyalty. By honing in on the branches of CLV, the overall value of those customers will increase, increasing the value of your company.
These are just a few ways that customer lifetime value can improve your marketing and business growth. With CLV, you can build a solid marketing plan that will send your company skyrocketing for success.