If you’re in business, target marketing is a necessary part of your business. And the deeper you get into the target marketing world, the more likely you are of discovering niche terms and metrics that apply to how effective your approach is.
One metric in particular is often misunderstood and, more often, overlooked. It’s called customer lifetime value, often referred to as CLV. A customer lifetime value is a calculation of what a customer has the potential of being worth to your business over their entire course of doing business with you. In some cases, it might refer to a single transaction. But in many cases, a great customer relationship can stretch out for months, years, even decades in the right circumstances.
While a small sale might seem minuscule in your overall business model, if you looked at it from a lifetime perspective, it might change the way you look at your customers. It might change the way you invest in reaching out and securing each new customer, and change how much you’re willing to pay to acquire them.
For example, a $100 sale today may seem small, but if that same customer signed up for a monthly program and was willing to pay $100 per month for the next year, how would that change your outlook? What if that same customer would stay with you for ten years; how would that impact your intended relationship with that same customer?
By looking at it through a new set of eyes, hopefully, you can see that your marketing to reach out to your customers isn’t an expense, but instead is an investment in how you build the relationships that are vital to your success.
Why should you care about customer lifetime value?
For businesses that offer monthly services, it’s easy to see how customer lifetime value can work to your advantage. But how about something that is more finite? What about businesses that only sell to their customers once – a home builder who contracts with a customer to build their dream home? With these types of businesses, it’s more difficult to see customer lifetime value upfront. It might seem like this doesn’t matter. But it does.
Let’s use the home builder to further look at how he can use CLV to his advantage. When his customers contract with him, they can either have a good experience or a bad one. That is dependent on the relationship the builder is willing to put forth.
The homeowner remembers every contact, every challenge, as well as every victory. They remember when the builder helped them save money. They also remember when they couldn’t solve a problem.
There’s an adage that says: birds of a feather flock together. And when someone builds a home, for this example, chances are they are friends with other people at the same like juncture. They know people who want to build a new home too.
The lifetime value of every customer is important, even those who seem to make one-time purchases because there is unlimited potential for referrals.
What if that home builder did a great job for his clients. And they told two friends, who told two friends, and so on. How much was that very first customer worth to his business growth?
How do you calculate customer lifetime value?
Let’s get technical for a minute.
Your customer lifetime value is a work in progress.
First, calculate your average sale and the gross profit margin you make per sale. Next, figure out how many times your average customer purchases from you. So, if your average sale is $500, of which you profit $100, and they buy ten times from you, your customer lifetime value would be $1,000.
How much would you be willing to spend on a customer if you knew ultimately they’d bring $1,000 to your business? A two dollar click no longer seems like that big of a deal.
- With those numbers in mind, you can start playing with options.
- What if you could increase the number of times a customer purchases from you?
- What if you could increase the average sale?
- What if you could increase your profit margin on every sale?
- Can you find more products to sell your customers?
- How can you build a referral process?
The great thing about this approach is one question leads to another. And before you know it, your targeted marketing program becomes fun instead of being a chore.
Because building strong relationships doesn’t take work, it’s something you choose to do when you’re working with friends. You look for ways to improve your products and services. You find ways that offer benefits all around the table.
What else can you do to increase customer lifetime value?
When you use the CLV approach in your targeted marketing plans, it changes the way you play the game. It gives you lots of room to look at every aspect of your business and make changes that can significantly improve the experience you offer to your customer base. It leads to building a stronger, more satisfying business life rather than one devoted simply to sales.
It allows you to ask smarter questions that build a more loyal customer base that wants to do business with you. Ideas include:
- Building a stronger customer service function – provide the ultimate customer experience that your customer not only appreciates, but they talk about and increase your referrals too.
- Solve problems before they ask – that’s why we love the online world. With landing pages and content management, you can provide answers to your prospects and customers even before they ask.
- Offer your customers something new – list building is important to the CLV process. Not only can you build one for leads, but you should also be building for people that know and love you. You can personalize like never before in the online world.
Every marketing move you make should be with the thought of retention, not just merely getting them to walk through the door. Because they’re more than leads. They’re potential game-changers for your business.
The most energy and money you’ll spend is on bringing a customer through your door for the first time. But the most memorable experiences you develop after they notice you are what will set you apart from your competition for years to come.
Where are, you focusing your energy?
Are you tracking your customer lifetime value? Are you using targeted marketing online methods to build it up?