A Layman’s Guide To Customer Lifetime Value (LTV) And Why It Matters

April 20, 2015 | Analytics, Marketing Strategies

Digital agencies and online marketers are happy to provide their clients a list of methods to increase sales, some of which may even have a logical approach and strategy (laugh).

The client takes the information in and replies back to the marketer asking for a price of their services, which is rebuffed with a complex pricing system that nobody can make head or tail of.

While this type of communication is all to common, one question that never seems to get asked is: what is your customer lifetime value (LTV?)

“You mean the customer’s age?”

No, not exactly.

What is customer lifetime value?

Customer LTV is not the age of your customer, but rather the amount a customer will spend over their lifetime as your customer. The simple formula to work out a customer’s LTV is:

Total customer revenue – total customer costs = customer lifetime value (LTV)

Let’s say the average LTV of your customer is $500. this means as long as it costs you less than $500 in marketing to acquire a new customer you will be at a profit right? Well not exactly, because you still need to pay your staff, rental bills and all other things that involve running a business.

Generally speaking you should aim to spend around 10% of a customer’s LTV obtaining new customers, so around $50 in the example above. To perform an in-depth customer LTV use this customer lifetime value calculator.

80% of your sales come from 20% of your customers

While measuring the average customer LTV is useful, not all your customers will fit into the same category. Some will purchase once and never use you again, others will keep on purchasing (the 20%), while many will hog up all your time and resources and be reluctant in spending.

Otherwise known as the Pareto principle, many believe that 80% of a business’s profits come from 20% of its customers. While the numbers may not be exactly 80/20 it will usually hold true that a small percentage of customers make up the majority of transactions.

By finding out the customer profile types of all your customers, you can better hone in your lead generation methods to find more of the “20% of customers” and less of the others.

Why you need to understand your customer LTV

Whenever you sign up to a new mobile or cable service you’re bombarded with amazing offers to lure your in, but once you make a deal years can go by without your provider offering you anyway kind of special deal or discount.

Instead, these companies focus on bringing in new clients and leave their existing ones high and dry. Only when you pick up the phone and threaten to cancel your service because it’s too expensive do they try and sweeten you up with special offers. But without you (the customer) taking action, you usually get nothing.

This is the approach many businesses take with their customers and dramatically cut their LTV by not nurturing them. This happens because they are quite simply unaware of the LTV concept. If businesses knew the value of each customer they would do everything in their power to keep them happy.

Benefits of maximizing LTV

There are many reasons why every business should maximize their customer LTV, such as:

Survival – Unless your business model is based solely on finding new clients to sell, you can’t survive without a loyal customer base. Understating your customer LTV and serving their needs ensures your business is still around 10 years from now.

Retaining customers is cheaper than sourcing new ones – one reports concluded that around 70% of businesses believe it’s cheaper to retain a customer than to acquire new ones. The report also went on to say that a better ROI was returned using relationship marketing over acquisition marketing.

customer lifetime value

The full article can be found here.

Increases customer loyalty- The great thing about customer loyalty is your current generation of customers will pass their loyalty onto their children and friends. Hundreds of businesses today provide ‘referral’ programs where customers can refer friends and family, both in turn are rewarded with special offers.

This type of acquisition marketing requires no effort and provides a better ROI than paid search or Facebook marketing (which are still just as useful mind you).

Helps branding – Customers who regularly buy your products will be the same people who follow you on social media, read your blogs and share your content. Maximizing your customer LTV helps get the name out about your business rather than focusing on short-sighted goals which can be harmful in the long-run.

How to increase LTV

It’s quite simple really, listen and serve your customers well. There’s no magical secret. Simply ask them what they want and give it to them. Here’s my top 3 ways to increase the lifetime value of my loving customers:

Send them a personalized gift – Sending gifts is an awesome way to extend the LTV of long serving customers. Don’t send a gift basket or a $100 Amazon voucher but really find out what they like and personalize it.

Perhaps they follow you on Facebook or Twitter, if so see what pictures they post or topics they talk about and consider sending something relevant to their needs. A little bit of research can go along way and makes the customer feel valued. When they feel valued they have no reason to leave.

Provide an upgrade – Customers who have used you for years or are very active on your social media profiles, why not throw them a free upgrade? If you sell products, perhaps send them something they haven’t used before that you think they will value.

This won’t cost you much and goes along way in increasing LTV.

Help customers reach their goals – I must admit I do watch wrestling because I am still a child at heart. The WWE actively takes part in the Make-A-Wish Foundation and makes wishes their fans have come true.

Business isn’t always about making profit but to build long-lasting, loving relationships with one another.

Summary

Are you measuring your customer LTV? Are you happy with how you look after longstanding customers? Is your team doing everything in their power to keep them happy? Ensuring a long LTV of your customer can be the difference between survival and liquidation.

James Dickerson

Founder of CrushCampaigns

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