Why Customer Lifetime Value Matters to Your Business
Do you know how to identify your best customers? A “good” customer may be seen as one who makes large or numerous purchases, is easy to work with, gives you lots of free word of mouth advertising, or deals only with your company. When it comes down to it, though, what matters most is the bottom line: How much net value does a given patron contribute to your company’s revenue from first to last sale? This is a concept known as Customer Lifetime Value (CLV). The accurate prediction of CLV can be a powerful tool for generating increased revenue. Identifying the customers who make the largest net contributions to your earnings and taking steps to retain them can help grow your revenue and strengthen your business.
Good Customers vs. Profitable Customers
Using CLV as a means to identify your best customers allows you to take factors into consideration that might otherwise be missed. For example, you may have a customer who spends a lot on your products, but who also demands a great deal of your time and resources before and after making purchases. If this buyer eats up a lot of your sales staff’s time or requires a significant amount of support from your customer service department, then there may be a big drain on the revenue generated by that patron. Likewise, a customer who is extremely loyal but makes infrequent or small purchases may generate less revenue than one who occasionally buys from competitors but regularly submits large orders to your company. CLV takes all of these factors into account and allows you to target your resources for maximum returns.
Managing Customer Attrition Effectively
More and more companies are beginning to rely on CLV as an indicator for how they should do business. One important way you can apply CLV is in monitoring and managing your customer attrition rate. In theory, you don’t ever want to lose a customer – but you also don’t want to waste resources trying to hang onto those who have little net impact on your revenue. Some ways to target your best purchasers include:
- Offering discounted or free upgrades
- Providing extra attention from customer service
- Creating special, targeted promotions
You may be better off letting go of customers who do little to boost your revenue, and directing your marketing dollars toward those most likely to become loyal, profitable purchasers.
Although Customer Lifetime Value is increasingly being regarded as one of the most important measures of customers’ potential worth, about four out of ten senior executives do not calculate it on a regular basis. Incorporating this strategy into your business plan can give you an edge and dramatically increase both your efficiency and your profitability.