Leveraging Customer Lifetime Value for Sustainable Business Development

An essential element of business management is identifying the customer and delivering values to them in a way that inspires them to develop positive sentiments towards your brand. A business can be said to have a strong customer lifetime value, when its customers see themselves and act as an integral part of your business. No doubt, this consciousness is reinforced by an interplay of economic facts.

From time to time, the entrepreneur must review the impact of customers on his business cash-flow and liquidity. Customer lifetime value is a metric used to measure the effect of the contribution of your customers on your business profitability. In other words, customer lifetime value helps business owners to understand how much their customers are worth to their business over a period. A simple calculation of the net customer’s contribution is expressed as customer expenditure minus marketing cost.

A weak or negative CLV surfaces when the customers’ contributions do not yield profits or they result in a loss for your business. This may be a strong indication that your customers have been estranged from your business and you need to take possible urgent steps to reintegrate and revitalize them.

CLV cannot be ascertained independent of the business’ customer acquisition and retention approach. Whereas both acquisition of new customers and retention of old customers lead to increase in sales and cash-flow, customer retention involves less marketing cost compared to customer acquisition.

Study shows that five percent increase in customer retention can translate in 125percent increase in profits; 10 percent increase in retailer retention can translate into 20 percent increase in sales; and extending customer lifetime value by 3 years can triple profits per customer.

The following are ways to leverage CLV to improve marketing performance:

1. Making targeted customer acquisition spending. The cost of acquiring a new customer should be determined by the propensity of the customer to generate sales value that can sufficiently offset the cost. In other words, if it is anticipated that a customer will inform higher sales, the estimated acquisition cost can be adjusted to convert this particular customer.
2. Allocating resources based on the best recruitment sources. Different recruitment sources present customers with different lifetime value. Identify those values, and spend more on the best sources. It is worthy of note that not all customers are worth retaining, you should consider customers that are likely to yield the highest returns over a period of time, and channel marketing resources to them accordingly.
3. Regarding how to analyse your customers to ascertain best marketing options, you can categorize them in terms of how regularly they the buy from you; their purchasing power or budget limit; and the sort of product they buy.
   Offering wide range of products to your customers through cross-selling and up-selling.
4. Avoid allowing implementation of your customer acquisition and retention plans to deride other essential marketing activities. For instance, rather than increase spending on promotional ads, you can organically project activities that showcase your company’s philosophy or values.

Resource:

Good Small Businesse Guide 2012: How to Start and Grow Your Own Business. Bloomsbury.