The lifetime value of a customer is an important aspect for any company as it determines what a customer may be worth to you if you manage to hold on to them for a prolonged period of time, versus what you stand to lose if your customers churn quickly.
The lifetime value of a customer is dependent on various factors such as:
- how long they stay customers;
- whether or not they upsell during their relationship with you; and
- other influences subject to your business model.
Customer Lifetime Value (CLV) is a highly important metric since it shows you how much you should be spending on marketing and support, as well as product development. You cannot spend more on onboarding a client than what they will spend during their entire lifetime with you.
The first step in finding out the lifetime value of a customer is to determine the average duration that the customer will be on a journey with you. For example, let’s say that the average lifespan of an average client is three years; you now need to calculate the average ‘spend’ of your clients. If the average ‘spend’ is $1500.00 a month then the average income earned from a client over the average three years is $54 000.00 ($1500.00 x 12 months x 3 years= $54 000.00). Therefore, the average CLV for your company is $54 000.00 minus the costs of servicing and onboarding that client.
In order to calculate how much an average customer will spend with you, use this formula:
(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
If you are a retailer, this whole process becomes a bit more complicated. For example, a coffee shop would need to work out how much the average customer spends on a single visit, they would then need to calculate how many times a week (or month) the average customer visits their stores (This is where surveying your customers becomes vital!).
Based on these statistics, you can then calculate the CLV of your customers, which will vastly change your perspective. You are not selling a $3.00 cup of coffee; you are investing in a $5 000.00 customer over the next five years!
Increasing the Customer Lifetime Value
Increasing the CLV of your customers can be achieved through positive customer experiences. The happier a customer is with your brand and service, the more likely they are to upsell and the longer they are likely to stay with your company.
Many businesses are worried about improving their bottom line by spending as little as possible and charging as much as they can. However, keeping your customers longer is equally crucial if not more so. You can only decrease your expenses so much and you can only charge so much, but holding on to your customers for longer is a sure way to increase profitability at a lower cost.
Ways of increasing your Customer Lifetime Value:
- Create good customer experiences.
- Advance your products continually so that your customers are not outgrowing you.
- Speak to your customers and allow them to communicate freely so that you know what they want and how they feel.
- Focus on long-term customers.
- Reward loyal customers.
One of the biggest mistakes, which many companies make, is targeting anyone and everyone just to make a sale. The unfortunate truth is that selling to the wrong clients will hinder you more than help you. Onboarding clients is expensive, marketing and spending time on sales is expensive and it doesn’t make sense to spend $1000.00 onboarding a half interested client who will spend $500.00 with you before churning. You have both made a loss and wasted valuable resources, which could have been put to better use.
You have to know who your target market is (and why) in order to target the correct long term sales, which will pay off in the long run. Know what your products and services deliver and who would honestly benefit from it. Then, invest your focus on selling to those who are a proper fit. It may take longer but will benefit you greatly in the long term.
In closing, the simplicity is this, in order to maintain your customers for as long as possible, you have to know what they want and when they are unhappy. The only way to do this is to ask them. It is very unlikely that you can take the time to personally contact each client on a regular basis, which is where real time surveys become invaluable to staying on top of your client base and their satisfaction levels. Dissatisfaction can be promptly corrected and suggestions for improvements can be used to stay ahead of your competitors in your planning strategies.