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Customer Lifetime Value: Understanding the Key to Sustainable Business Growth

Posted by Andrew Gibbins on 06-Aug-2020 11:30:00

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Not all customers are worth the same to your company long term. In order to get the most out of your business, you'll need to understand Customer Lifetime Value (CLTV) and use it to your advantage as you shape your sales and marketing strategies.

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What is CLTV?

Customer Lifetime Value, is a metric used to measure how much revenue a single customer account can offer over their full lifetimewith you. In order to calculate it, there are three essential factors to take into account:

1) The average amount the customer spends per payment period (e.g. monthly, quarterly, annually, or per order),

2) How the average revenue pattern changes over time – e.g. what is the maximum average order value per customer, and how does this reduce or increase?

2) The average customer lifespan, or retention period.

A sophisticated CLTV calculator will see you comparing average purchase value, purchase frequency, and lifespan. This way, you'll be able to see at a glance how valuable each particular customer is to your business. Customer lifespan is particularly important. A single large purchase may give your revenue a short-term boost, but customers with a reliable spending track record are worth far more in the long term. Remember, it costs less to retain a happy customer than it does to court a new one!

A CLTV optimisation strategy should seek to maximise all three metrics; longer retention period, bigger payments and increased upsell.

How to Improve CLTV

To put it simply, there are two ways to improve CLTV: encourage customers to spend more, more regularly, and encourage them to stick around for longer.

To achieve the former, ensure your service portfolio is on point, develops in response to customer needs, and is competitively priced. Use feedback forms and analyse information from your customers to see if there are complementary services or products you could offer.

The latter is best tackled through strategies that encourage customer retention. Regular contact, feedback, and prompt customer service will all help lower customer churn. A customer who has an established, personal relationship with your company is more likely to stay with you through hard times as well as good.

The Impact of a Recession

Being aware of the value that each customer offers is particularly crucial during a recession. As the world of business struggles with the impact of coronavirus, it's vital to stay on top of your metrics, so you can target sales prospects with a good long term potential CLTV.

When the economy suffers, CLTV can take a hit. Firstly this is because businesses are less willing to spend money and make investment decisions when the economic outlook is uncertain. Secondly, a sudden downturn is a moment when customer retention is in danger. As everyone tries to save money and make economies, customers are more likely to shop around in search of alternative solutions. (This danger recedes after the first few months of a recession. In a longer term downturn, customer retention paradoxically becomes easier as businesses shun the uncertainty of changing supplier – although margins and CLTV may still suffer.)

The Solution to CLTV Uncertainty in a Downturn

The best strategy is to tighten your sales focus. Rather than looking for every new customer you can find, pay attention to those who offer a higher lifetime value. This may be your existing customer base, if they have a high CLTV; you might also use the recession as an opportunity to find new customers who are unhappy with existing services. Be strategic with sales. A prospect with lower order volumes or value but the potential to stay with you a long time may bring you more profit than a large, one-off order.

Ride out the Recession with JDR

Either way, a tight focus on high long term value customers will have a greater payoff than casting your net too widely. Use a business development specialist like JDR to develop bespoke customer retention strategies that work. This way, you will have less risk of losing valuable customers during a financial downturn. If you are looking for new business, be smart. Target carefully, looking for a select few customers who offer a high potential CLTV. Stay on top of your CLTV metrics, and you'll be able to weather any financial storm.

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Topics: Strategy