Lifetime Value of a customer
Companies lose an average of half of their customers every five years.
It costs an average of five times as much to attract a new customer as it does to retain a current customer.
Many factors affect customer retention; some are controllable and some not.
Whatever the causes, too often they go uncorrected.
Effective change happens by learning from our failures as well as our successes. You need to understand the causes of customer defections and the reasons for customer loyalty.
Establishing the necessary processes to track and analyze your customers will increase your understanding. Tracking your customers will also enable your organization to clearly see the connection between customer loyalty and company profits.
LTV determines your customer equity, by balancing the cost of acquiring new customers and the future profits that can be expected by retaining your best customers.
What is the lifetime value of a customer?
There are two primary phases in determining the worth of a customer.
The first phase deals with acquisition. How much does it actually cost to acquire a new customer? This means looking at promotional costs, expected response rates, average responder spending, and your profit margin.
The second phase deals with retention and the amount of revenue the customer will generate in the future. By looking at purchasing history, you can identify purchasing trends. Depending on the nature of your business, it may require three to five years worth of customer data. Combining the purchasing and promotional history with the acquisition information allows you to determine the actual dollar amount that each new customer will bring to the company over that customer’s lifetime.
How much should be spent on acquiring new customers?
LTV can be used by organizations to determine and cost-justify how much should be invested in promotional and sales efforts for customer acquisition. LTV can also show if acquisition efforts could be refined through selective targeting. How much should be spent on retaining current customers? Just as with acquisition, organizations can use LTV to determine and cost-justify how much should be invested in promotional and customer service efforts to retain current customers.
Current customers are your best prospects for future sales because they already know who you are, what you offer, and how you do business. Because you already know their purchasing habits and preferences you should be able to appeal to their wants and concerns.
How much should be spent to reacquire a past customer? If a customer has defected, finding out why and correcting that problem offers an opportunity to win that customer back. If, based on LTV, the customer was profitable, a promotional offer to bring them back can easily be cost-justified. What is the most productive media for acquisition promotions?
The cost of acquiring a new customer is tied directly and absolutely to the response rate of promotional efforts. Depending on the type of product or service being offered, different media will produce different results. By analyzing the cost of the promotional vehicle against the response rate, you can determine which media is truly the most profitable.
What price should be charged for products or services?
Another area that LTV can help is in price setting. If the cost to acquire or retain customers is high, then an appropriate price must be set in order to maintain overall profits. By using LTV to understand the worth of your customers, the profit margins of your products can be maximized. LTV provides clear and concise information about the value of each individual customer and that individual’s impact on your organization’s profits.
LTV to Your Advantage:
1. Assign a dollar value to your customer base.
2. Set investment levels for acquiring new customers.
3. Set investment levels for retaining customers.
4. Set investment levels for reactivating past customers.
5. Select the most productive media for promotions.
6. Set prices for products and services.
