In branding, we talk a lot about improving your customers’ experiences on a regular basis, making them your top priority, and keeping them from considering another option through personalised experiences, improved customer service, product innovation and development, and so on. But the truth is, we all know that some of these things cost money to build and even sustain.
Perhaps this is one of the reasons you need to understand customer lifetime value. When it comes to business, customers don’t hold the same value. Some are definitely more valuable than the others. So, while you’re doing customer acquisition through marketing and sales, you want to be able to make informed decisions on how to target the best kind of audience who can reward you well enough so that you can afford all that is needed to keep your brand growing, and so that you can be able to keep your systems running efficiently.
Now, what is the customer lifetime value (CLV)?
It’s simply the average amount a customer will spend on your business over the entire life of your relationship with him/her. So, let’s imagine Mr. Shola patronizes you 3 times every year, and each time he does, your profit margin on the transaction is ₦50,000. Also, he has been a loyal customer for the past 2 years. The CLV for Mr. Shola is 3 x ₦50,000 x 2 = ₦300,000.
So, let’s assume it took you ₦15,000 to acquire Mr. Shola as a customer. That means you’ve made (₦300,000 – ₦15,000) as his net customer lifetime value. And what does acquisition mean? It simply means the amount you spent on marketing in order to get a customer. It’s often being calculated as the number of customers acquired divided by the amount that was spent. So, If I spent ₦30,000 on Facebook ads and got Mr. Shola and one other customer (making two people), it simply means it cost me ₦15,000 to get each of them.
What can you make out of this as a small business owner?
– You get to see your most valuable customers, who should get most of your attention in terms of an improved personalised experience, better treats, more incentives, etc. Remember, more is expected of those who are given more. You can’t afford to treat every customer the same way. There are some who, by reason of their investment in your business, should have some level of attention and advantage. This makes business sense!
– You get to track the channels through which these most valuable customers were acquired. And you want to start paying more attention to those channels because there is every chance that you’ll always get similar kinds of customers through those particular channels.
– You get insights on how to segment your email marketing, sms marketing, so that you can communicate differently and in more personalised way to the customers whose lifetime value mean something to your business.
– You gain insights on how to trigger customers with low lifetime value so they can also come up the ranks. You can then begin to see how to introduce exclusive packages meant for people who meet some buying criteria, and those who have been falling short will see a sweet reason to want to purchase more.
– If the nature of your business also makes frequent repeat purchases impossible, your CLV will reveal it, and you can then start thinking about programs/packages that will warrant more purchases, retainerships, referrals, etc.