UNDERSTANDING THE CUSTOMER LIFETIME VALUE

Many of us have made our way through life wondering the true value of being taught mathematical equations such as Algebra and Pythagoras’s theorem, while at school with minimal if any real-life practical use. Nine times out of ten they are totally forgotten once in the working world (if not earlier). However, from this point forward you will come to know, own and swear by a new equation: The Customer Lifetime Value (CLV)

In short, the CLV allows you to see who your most valuable customers are, and who you should be targeting. The definition of CLV is considered to be:

“The value attributed to the customer during his/her entire relationship with the company.”

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UNDERSTANDING THE CLV

WHY SHOULD YOU CARE ABOUT THE CLV,

WHAT GOOD WILL IT HAVE ON YOUR BUSINESS?

Plain and simple, yes, you should care. The CLV is a calculation used by a business to predict the value it will receive as a result of their relationship with a customer during their lifetime. However, as it’s almost impossible to guess exactly how long each customer’s relationship is going to last, the CLV allows you to make a good prediction.

For many businesses, it's understood that roughly 80% of company revenue is generated by only 20% of their consumers. Understanding the CLV will help you find out that some customers are worth more to you than others, it will help you to identify your “VIP” clientele - these individuals are incredibly valuable to your business. To break it down even further, it can be considered a case of quality over quantity.

Customer acquisitions are undoubtedly crucial to your business, but you might have been going about this in entirely the wrong way. Instead of thinking about the quantitive over qualitative the CLV is going allow you to hone in on your VIPs. It will also allow you to enhance your acquisition spending economically and efficiently to maximise on value, rather than looking for minimal initial cost.

Table 1

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EXAMPLES OF CUSTOMER ACQUISITION COSTS

*Not actual prices

If you were to look at the customer acquisition costs alone you might be lulled into a false sense of security, and would think to go with Google Ads because you’re spending the least amount of money to gain the most customers. If you take into account the CLV you can sometimes get a very different story.

THE STORY CHANGES WHEN CLV IS ADDED…

Table 2

DATA BREAKDOWN

When you take into account the CLV of using the different platforms you can see it provides a more detailed picture of how great your return on investment (ROI) will be. From a customer acquisition standpoint investing in Google, Ads would undoubtedly be the best option; it represents the highest ROI for the number of customers acquired for the least amount spent. However, as shown in the table above on a grander scale, it is, in fact, going to bring in the least amount of revenue to your business. If we look at the initial investment for Snapchat it’s triple that of Google and the number of customers is lower. However, the customers gained from Snapchat are far more valuable to your business.

You’ll be able to:

1.) Decide on which products and services should be offered and promoted. 2.) Hone in on new customers/markets to target. 3.) Discover which customers will provide the most return. 4.) Understand those customers that are “unprofitable” and should be “let go”. 5.) Change pricing to create more value. 6.) Understand when and where to cut costs and investments that aren’t contributing to growth.

Having a strong understanding of the CLV of individual customers has the ability to provide a lot more clarity on the actual value of your customer.

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WHAT BENEFITS DO YOU GAIN FROM

UNDERSTATING YOUR CLV?

CALCULATING YOUR CUSTOMER ACQUISITION COSTS

Using the method from Table 1 calculate your customer acquisition costs.

What platform/method gives you the best return from your investment?

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CALCULATING YOUR CUSTOMER LIFETIME CYCLE Using the method from Table 2 calculate your customer lifetime .

Which platform/method of acquisition provides the best return for investment after considering the CLV:

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BENEFITS FROM UNDERSTANDING YOUR CLV

Which products and services should be offered and promoted:

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Hone in on new customers / markets to target:

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Discover which customers will provide the most return. List your top three clients, and how much the income will be for your business:

1)__________________________________________ ________________________________________________

2)__________________________________________ ________________________________________________

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UNDERSTANDING WHICH CUSTOMERS ARE

“UNPROFITABLE” AND SHOULD BE “LET GO”.

Top three unprofitable customers who potentially need to be let go:

1)____________________________________________________________________________________________

How much do they cost (to retain): £________ How much do they bring in: £____________________

Should they be let go? (Circle you answer): Yes - No

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How much do they cost (to retain): £________ How much do they bring in: £____________________

Should they be let go? (Circle you answer): Yes - No

3)____________________________________________________________________________________________

How much do they cost (to retain): £________ How much do they bring in: £____________________

Should they be let go? (Circle you answer): Yes - No

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CHANGING PRICE TO CREATE MORE VALUE

Do you need to increase or decrease your price to cope with retention and profits?

What price would have you get a better return:______________________________________________

Why? Explain your answer: ___________________________________________________________________

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