Customer Lifetime Value

The lifetime value of a customer has an intuitive appeal as a marketing concept. It lets a business owner know exactly how much they can invest in marketing to obtain and retain their customers. The lifetime value of a customer should drive your marketing decisions.

There are many ways to calculate a Customer Lifetime Value (CLV) ranging from simple methods with two bits of information all the way complex formulas with inputs such as churn rate, periodic review, and retention rate. For these calculations you need a degree in mathematics to figure them out. I prefer the simpler method of taking the annual profit margin of the average customer and multiplying it by the number of years you expect the customer to purchase from you. This method may not be as exact but it gives me a starting place and is better than not knowing at all.

There are certain factors that need to be considered based on the type of business. For example, the profit margin for a car dealership will be high but the customer may purchase a car every 3-5 years. Assuming excellent customer service and the brand is reliable, the customer may purchase up to 10 cars from that dealership over their lifetime. The profit margin for a grocery store will be much lower than that of the car dealership but they deal in volume since the customer may return every week.

Other issues to consider may be location. For example, a typical home owner may purchase a house every 5-10 years. However in a military town, the turnover rate may be shortened to every 2-3 years. The potential for income from turning over a house every 2-3 years is greater and the real estate agent can spend more on marketing to the homeowner after the sale to ensure they list the home with them when they are ready to move.

Once you have an idea of your CLV using the simpler method, investigate the more complex methods. They will take into account cross-selling and up-selling, customer acquisition costs, credits and returns, etc. So, what’s your Customer Lifetime Value?

Do You Ignore Your Customers?

Think about the last time you received a thank you note from someone.  It felt pretty good didn’t it?  It feels good to be remembered and acknowledged.  Your customers want to enjoy that same good feeling from you.

The simple act of thanking your customers is, perhaps, the single most powerful and memorable marketing method available to you.  Yet, if you are like most companies, you are too busy to personally recognize your customers.  These are the people who make your growth and prosperity possible.

A recent survey asked, “Why do customers quit?”

• 3% move away
• 5% develop other friendships
• 9% leave for competitive reasons
• 14% are dissatisfied with the product
• 68% quit because they feel ignored

Over two-thirds leave when a simple “Thank you” or “How are you doing?” would have saved the relationship. You have invested too much to let your best customers go unacknowledged.  When you let them know that you truly appreciate their trust and confidence in you, you increase the lifetime value of your relationship. 

Consistent personal contact is the best defense against losing customers due to neglect. Try this exercise, divide your customers up into A’s, B’s, and C’s.  The C list is made up of customers who will probably not buy from you no matter what you do.  Let them go. The A list are your best customers.  They typically make up about 20% of your list but provide 80% of your revenue.  These are the ones you want to keep.  The B list are ones that have potential to move up to the A list.  You do not want to forget them.

Contact the A list monthly and at least quarterly you need to have a face-to-face meeting with them.  The B list should be contacted at least every other month until they move up to the A list.  Methods of contact include e-mails, phone calls, newsletters, cards, promotional items, and personal meetings to name a few.  The purpose should be to touch base and not to sell them something.

Once you have established a loyal base of customers, you can begin to ask them for referrals. Your customers will appreciate your personal touch, feel comfortable referring others to you, and purchase from you time and time again . . . paving that road to growth and prosperity.