Many startups blindly execute marketing strategies without much research or scientific basis. Some simply follow the marketing bandwagon: launch a website, pay SEO experts to rank them on top of search pages, join tradeshows, setup a social media page, print flyers, and so on. But at the end of the day, a lot of them don’t know exactly what their typical customer is truly worth to their business and how much impact it has on their bottomline.
Today I’d like to briefly discuss the importance of a Customer Lifetime Value (CLV).
Calculating your Customer Lifetime Value
According to marketing experts, Customer Lifetime Value is defined as the total value, in monetary terms, of your average customers spanning the entire period that these customers are likely to do business with you. It’s the potential contribution of your customers to your business over a period of time.
Let’s assume that your business has 1,000 customers who remain with you for 12 months.
In his article How to Calculate the Lifetime Value of a Customer, Australian entrepreneur and business coach Brad Sugars shares a simple formula to estimate CLV:
(Average Value of a Sale) x (Number of Repeat Transactions)
x (Average Retention Time in Months or Years for a Typical Customer)
If you’re running a dental clinic, law firm, or plumbing business for example, you should be able to compute for your CLV just by putting an actual or estimated figure into that equation.
An easy example Sugars mentioned would be the lifetime value of a gym member who spends $20 every month for 3 years. The value of that customer would be:
$20 x 12 months x 3 years = $720 in total revenue (or $240 per year)
So for as long as a gym owner spends less than $240 to get a new member, then each customer she’ll acquire will translate to profit.
Why is CLV Important to your Business?
Research shows that it will cost you 5 to 7 times more to attract a new customer than it is to nurture existing ones. Knowing the importance of your Customer Lifetime Value provides many benefits. Here are some of them:
- Devise better ways to segment customers according to their profitability (repeat customer vs one-shot consumer)
- Identify how much time and money you are willing to invest to acquire a customer
- Thoroughly evaluate which of your marketing efforts delivered the most profit
- Make informed decisions on how to spend limited marketing dollars
- Find out whether outsourcing is a feasible option to drive more repeat customers
- Know when to offer discounts and build loyalty programs accordingly
Nurturing and Increasing Customer Value
Keep your profitable customers by building a relationship with them. Make them part of a social community and get their insights whenever you need it. Try up selling to them. It could be as simple as offering add-on items near the counter before they make a purchase.
Maintain an open communication between you and your market. Send them regular updates, connect with them through newsletters, or share company announcements through social media. You can also provide support by making yourself or a customer service team available to consumers even after business hours. Give them options to send questions, comments or feedback through your website or personal email if possible.
If you start focusing on your Customer Lifetime Value now, then you’ll gain more control over your business profitability and long term success.