If you run a small business, then you have no time (or money) to waste Ineffective tactics.
So how do you ensure that every effort is worthwhile? There are a lot of trials and errors, but there are also certain indicators that can help you determine whether it is worthwhile to use valuable resources in one direction rather than the other.
One of the big shots: Customer lifetime value (CLV), Which allows you to determine the return on investment for each customer relationship-and thus determine which relationships are best for building your business and which are not.
If you are not familiar with the idea of CLV, we are here to help you. We have compiled this quick guide on customer lifetime value, including what it is, why it is important, how to measure it, and some quick tips on how to improve it.
What is customer lifetime value-why is it important?
Customer lifetime value is an indicator used by companies to determine the value of a customer to their company.
Not all customers can bring the same value. Focusing on those who provide the most profitable and sustainable relationships is a great way to ensure that you put your marketing and sales resources where they can be most useful.It can also help your business invest more Customer retention and customer acquisition -The former is usually much cheaper and more profitable than the latter.
When it comes to understanding your customers, CLV may be the single most important metric for your small business. It provides you with the data you need to answer some major questions about marketing, sales, products/services, and how to best serve customers. E.g:
- Marketing: How much should you spend to acquire a new customer?
- Sales volume: Which potential customers should I spend time with and strive to achieve?
- product: How can I best adjust my product/service to match my ideal buyer?
- customer service: How much should I spend to retain and support customers?
CLV shows you how much return business you can get from customers, which in turn will help you decide how much you are willing to spend to acquire new customers for your small business.
How to measure customer lifetime value
When you are in charge of a business, you are keenly aware of who your best customers are. This intuitive knowledge is an important part of understanding CLV, but you can also use some specific metrics to hone your MVC (most valuable customer).
It is worth noting that there is no single mathematical equation that can prompt you to understand the value of customers. Instead, you need to look at many different metrics to accurately calculate your CLV. These include:
- Annual revenue per customer
- Average number of years as a customer
- Average profit margin per customer
- Customer retention Rate
- Initial cost of customer acquisition (total sales and marketing costs/number of new customers)
All these indicators provide you with a different puzzle, which ultimately tells you which customers bring the most value to your business. They are also closely related to calculating the cost of customer acquisition, providing the necessary link between the cost of acquiring a new customer and the return that the customer brings to you.
Let’s use an example to calculate CLV using some of the above indicators:
Suppose you have AAA Taxes and you provide a tax preparation service that charges each customer $500. It costs $250 to acquire a new customer through Google Adwords.
On the surface, this seems to be the secret of disaster. Half of your expenses will be spent on sales and marketing costs. However, once you understand that ordinary customers will be with you for 9 years and provide a CLV of $4,250, the return on investment is undeniable.
- Tax service revenue per customer = 500 USD
- Average number of years as a customer = 9 years
- Initial acquisition cost = 250 USD per customer
Annual revenue per customer X Years —— Customer acquisition cost = Lifetime value
500 USD x 9 – 250 USD = 4250 USD
Once you determine the CLV, you can better evaluate how much you spend on attracting new customers and how much you spend on customer retention.
There are more in-depth ways to calculate your CLV, such as breaking down your customer acquisition costs in more detail and adding your customer retention rate, but the goal is still the same-identify customers with high CLV so you can get more and find List customers with low CLV so that you can decide whether to focus on improving that customer base or eliminate them altogether.
How do you use CLV to determine which relationships are no longer valuable?
You have about 60-70% probability of selling products to existing customers, but only 5-20% The probability Sell to new potential customers.
Relying on CLV to identify your most valuable customers is the key Maximize customer retention potentialOn the other hand, it is equally important to determine which customers will ultimately cost you more than their value.
CLV is about efficiency.The more you can be customer-centric at least The more efficiently you achieve your profit goals, the more you can focus on achieving your profit goals. If customers spend your time and money more than their overall value to your business, it indicates that you need to shift gears and shift your attention elsewhere.
As for ending unprofitable relationships, this is a subtle route, but not impossible. If this is a long-term relationship, please publicly explain why you think your solution is not suitable for them, and suggest alternatives. Make sure to solicit feedback on issues that may arise and where you can do better in the future.
How to improve your CLV
In order to increase your CLV, you need to improve the quality of your customers and customer relations. Here are some ways to do it.
- Destination boarding. When you bring in new customers, talk to them about the unique challenges they face and the value they hope to derive from your product or service, and then introduce them to specific features that can help them the most.Consider sending them a series Onboarding email Help them learn tricks and manage expectations.
- keep in touch. Keep in touch with existing customers by checking in and sending emails semi-regularly Consistent content flow This helps ensure that they get the most value from the purchase.
- Give priority to customer service. Provide services to customers when they need it, using an omni-channel strategy that includes not only phone numbers and email addresses, but also responsive chat and social media. In the meantime, please make sure that your customer service staff are well-trained so that when your customers really need help, you can provide assistance in the most effective way.
How to maximize your customer lifetime value
Not all customers have the same value to your business. For example, the CLV of B2B may be different from B2C. Or maybe a source of potential customers (such as Facebook or recommendations) is more effective.Use the CLV formula to better understand which Customer role It is the most profitable for you.
By determining which market segments or sources of potential customers have a higher CLV, you will be able to better allocate marketing and sales investments to acquire these customers.
Customers want to personally connect with your brand and your business. But as time goes by and business grows, it becomes more and more difficult to interact with all customers in a real and meaningful way.By using such Marketing automation, You can better understand your customers’ online behavior and automatically send them the right messages at the right time-increasing awareness, conversations, and conversion rates.
Up-selling and cross-selling
The longer the customer stays with you and the more they spend, the greater the CLV. Therefore, if you want to increase the lifetime value of your customers, look for ways to promote new services or products to your existing customer base. Upsell is when you find a way to increase revenue in the same product or serviceFor example, compared with a standard service product of US$500, advanced tax services are sold at a price of US$700 as an upgrade service.
On the other hand, cross-selling is when you sell new products to existing customers to increase revenue. For example, if you want to sell financial planning services to every customer who receives tax credits.
In response to the unique needs of customers, you can provide them with content and offers when they are ready to buy, thereby making it easier to increase revenue and sales.
The better you treat your customers, the better they will treat you. Increase your CLV, you will not only have happier customers, but also bring more profits to your business.