What is customer lifetime value?
Hello there my name is Martin Henley, this is the what the series and in this episode number 13 we’re answering the question what is customer lifetime value?
In addressing the question what is customer lifetime value? there are five things we’ll be sharing with you. We are going to give you a definition of customer lifetime value; we’re going to think about why customer lifetime value is so important; when you should be using customer lifetime value; how you calculate customer lifetime value and what you can do to increase your customer lifetime value.
Let’s go Ricky.
Did we find a definition of customer lifetime value?
If we are going to understand customer lifetime value we will need a definition and we found one at QualtricsXM.com. What they tell us is that “CLV or customer lifetime value is the total worth to a business of a customer over the whole period of their relationship.” What they are telling us that this is the total amount of money that you generate for every customer that you win. Easy
Why is customer lifetime value so important?
Which brings us straight to the question why is customer lifetime value so important? Well, customer lifetime value goes to profitability. If you saw episode number 12 what is cost of customer acquisition? you will know that you are investing an amount of time, an amount of energy and most importantly an amount of money in acquiring new customers. Clearly, the more money that you generate back from each of those customers the more profitable your business will be.
The second reason that customer lifetime value is important is about long-termism. In business what typically happens is people start to think very short-term. People, bosses, clients might think that I have spent two thousand pounds on marketing this month and I’ve only generated £2,000 in sales. If you can convince your clients or bosses of the lifetime value of each of those customers, those customers could be with you, spending money, for two years in which case it doesn’t make sense to take only one twenty-fourth of their spend and compare that to what you are spending on marketing. Customer lifetime value is about thinking long term, and especially thinking long term about the value of your customers. Essentially customer lifetime value is about understanding the true value of your marketing.
That brings us to the third point which is about value. We have spoken in this series about how people are coming to you, to buy from your business, because they have problems in their lives that they need to resolve. The more of those problems you are able to resolve the, more value you offering to your customers and the higher your lifetime customer value. If you have successfully helped them to resolve one issue, potentially you could be helping them with more and more issues and adding more and more value to their lives.
When is customer lifetime value useful?
Which brings us then to point number three which is the question when is customer lifetime value used?
Customer lifetime value is most often used in the instance that we’re using it right now, whilst we are performing an assessment of our marketing as part of our situational analysis. Lifetime customer value tells you how well you are doing in terms of retaining customers and making sure that they continue to invest in the products and services that you provide.
Customer lifetime value is also used to justify investment. If you can go to your bosses and you can say we acquire a customer for X amount of money and we generate five six seven times that amount of money in terms of customer lifetime value then that should convince them to continue to invest in the marketing that you’re doing.
Customer lifetime value is also used when you come to value a company. The true value of a company, if it were to come up for sale, should be calculated on how much it costs that business to acquire a customer and what the customer lifetime value.
How do you calculate customer lifetime value?
If you are hearing me and you’re thinking yes customer lifetime value sounds like a really useful and really important thing for me to understand in my business; the only thing is that I don’t know how to calculate the lifetime customer value or the customer lifetime value. You need to know that this is a super, super simple sum. All you need to do if you’re doing this for the first time in your business is go back to the very beginning of your business and look at the total sales income; all of the money that you have generated in your sales and then you simply divide that by the total number of customers that you have had during that period.
So, for example, if I have had a total sales income of £100 pounds and I have acquired 10 customers then my average customer lifetime value is 10 pounds. You might also be interested to do this by customer. All you do then is take the total sales from that individual customer and you divide it by the number one. If for example X company have spent four thousand pounds with me then I know that the customer lifetime value of that particular customer is four thousand pounds.
What’s interesting here is if you take this number the total sales income as opposed to the sales by an individual customer, this will give you your average. Armed with this lifetime customer value then you can tell your bosses — every single time we take on a customer they end up spending X amount of pounds with us on average which is why we should be looking to invest more in the marketing and acquiring new customers.
How do you increase your customer lifetime value?
Which brings us then to point number five which is the question that you really want the answer to which is how do you increase your customer lifetime value.
We have come up with six ways that you can increase your customer lifetime value.
The first opportunity to increase your lifetime customer value is what we call in marketing an upsell. You will be familiar with an upsell if you have ever eaten at McDonald’s because immediately you order your food in McDonald’s they will ask you would you like fries with your meal — once you’re taking the fries you might as well take the drink and now you might have doubled your spend over what you were originally intending to spend. In McDonald’s the upsell happens at the point-of-sale, which is the very best time for an upsell. When people are buying you from you the first time you should offer them something extra that they could buy in that very first instance.
The second opportunity to increase your lifetime customer value is through ongoing communication and cross selling. Just like an upsell this is just about offering your customers more value — you bought this thing from us you’ve got value from that, you might also like to consider buying this other thing from us. Communicate with your customers regularly through email or phone calls and let them know that there is more value that you could be offering in their lives.
The third opportunity to increase your lifetime customer value is through subscriptions. You may not know that Adobe, since they offered a subscription service in 2013, have doubled their turnover to almost 10 billion dollars a year. I subscribe to Adobe and I give them $10 a month but I don’t ever make a decision about whether I’m going to spend that $10 or not. In the four years that I’ve been subscribing I might have spent $500, but I never made a $500 decision, I never consciously decided that I am going to spend going $500 with Adobe. They continue to take the $10 out of my account each month and I continue to use their products and services and that might go on forever.
That brings us to the fourth opportunity to increase your customer lifetime value which is about retention and loyalty. Famously in the UK supermarkets offer loyalty cards, they give their customers the impression that as long as they continue to spend with them they will get better deals. The supermarkets give their customers points which in the longterm will give discounts on future purchases. Retention is really important and you need to think about how long you keep a customer and work on keeping them for longer.
The fifth opportunity to increase the lifetime value of your customer is about understanding your clients better and better. This is tied in with the ongoing communication, your mission as a marketeer is to understand your market, and your customer better and better and better. You have the ear of your customers, you have the email address of your customers, so you should be continuously talking to them about the challenges that they have in their lives and the ways you might be able to develop solutions to those challenges and deliver those solutions.
The final opportunity to increase your lifetime customer value is about new product development. We have established when we spoke about customer acquisition and when we spoke about our offering that it is much more cost effective to develop new products and offer them to your existing customers than it is to find new customers for your existing products. If you are doing the customer loyalty, if you’re doing the retention, if you’re doing the understanding then it should be really easy for you to develop new products that offer new value to your customers which will clealry drive up your customer lifetime value.
Did we define lifetime customer value effectively?
If you are still with us well done, you now know exactly what customer lifetime value is; you know why customer lifetime value is so important; you know when to use customer lifetime value; you know how to calculate customer lifetime value and you know how to drive up your customer lifetime value.
What should you do if you have found this interesting or useful?
If you have found this video interesting or useful please take a second to check out video number 14 what is customer analysis?
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We are done here Ricky.
Martin has built a reputation for having a no nonsense approach to sales and marketing and for motivating audiences with his wit, energy, enthusiasm and his own brand of audience participation. Martin’s original content is based on his very current experience of running effective marketing initiatives for his customers and the feedback from Effective Marketing’s successful and popular marketing workshops.