Understanding Your Customer’s Lifetime Value

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Customer Lifetime Value predicts how much a customer will be worth during the entire relationship with that customer. Understanding the implications of acquiring long term long-term customers as opposed to short-term is important to just about anyone who is trying to sell something. Here’s why:

CLV And Customer Acquisition

The Pareto Principle States that around %80 of the effects of something come from 20% of the causes. Statistics show that much of the time this is true for ecommerce, meaning 80% of a businesses revenue comes from %20 of customers.

Keep that in mind when campaigning to acquire customers. Targeting the right people is more important than targeting a large quantity of people. Often casting a large net on Adwords can boost sales for a company, but it can fall short to organic social media marketing when it comes to creating a lasting relationship.

In this way, a large spike in sales after an ad campaign can be misleading, because a single boost in revenue due to one-time sales pales in comparison to finding a few loyal customers.

Recency, Frequency, Monetary (RFM) Analysis

RFM Analysis is a technique used for measuring Customer Lifetime Value. Using RFM analysis, customers are ranked 1,2,3,4, or 5 (5 being highest) for each letter.

For example, a customer who buys often but has not recently would score high in the “F” parameter, but low in “R”. If we assume what when the customer buys, his or her purchase is usually above average in regards to how much they spend, we could could roughly give them an RFM score of “154”.

The three scores together are referred to as an RFM “cell”. The database is sorted to determine which customers are “the best customers”.

While this is a great tool for any marketer, experts warn not to neglect customers that scorer low. Instead of a company writing off these customers as those that they should be spending fewer resources on, rather they should be working to grow these customers’ scores.

Know The Cost Of Your Customers

Customer acquisition is, of course, not a one-size-fits-all process, but no one wants to spend more than they need to on it. Without CLV in mind, acquisition costs are going to be inaccurate. You can’t truly measure the ROI of an ad campaign until you have seen how it has boosted sales over a long period of time.

If you ignore the variables that may have brought in fewer, more long lasting customers, you may be missing a large piece of the puzzle when creating further strategies.

Tailor Your Products For Your Best Customers.

CLV can help beyond acquisition through ad campaigns. Every company knows that they should be listening to their customers when making changes, but what’s more important is that the most valuable customers are heard the loudest.

What are the qualities in those certain customers that make them continue to stay around? Do your long-term customers use your product differently than the short term? Those are important questions to consider when deciding in what ways your should be updating your product.

While no review should go unnoticed, take reviews from less valuable customers with a grain of salt. Conversely, if you are hearing from your best customers (even if it is only coming from the %20), strongly consider what they are saying.

Improve Your CLV

Engaging with customers is one of the best ways to improve their loyalty. It’s a great idea to feature your customers in your content. Weather that be a B2B case study, or simply a picture of a customer enjoying your product on your home page.

Going above and beyond with customer service is a great way to gain loyalty as well. Not only will it enhance your relationship with that particular customer, but it can also serve as a talk-trigger to bring in customers that will already have a good opinion of you, and likely end up as a more loyal customer.

Understanding Customer Lifetime Value is essential to small business owners and marketers alike. Take a close eye to the long term data, and make sure you are valuing customers for what they are really worth.

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