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Small-business owners are often worried about certain key performance indicators (KPIs) and metrics, like revenue, conversion rates, and other marketing and sales data. In the effort to boost the bottom line, you might be overlooking one big number that can make the biggest difference of all: customer lifetime value (CLV).
Many small businesses get preoccupied with finding new customers and closing new sales. The thrill of chasing new business, selling to new markets, and driving new growth can be fun and fulfilling. But “new” business is not the only way to build a successful revenue base. What about “old” business — also known as “existing clients” and “repeat sales”?
Let’s look at what CLV means and how you can use this concept to improve your customer retention strategies.
What is customer lifetime value?
Do you know how much money you’re making from each customer over the very long run — the “lifetime value” of that customer relationship? Customer lifetime value (CLV) is a sales and marketing metric that helps you understand how much money you make from each customer (on average).
One way to calculate CLV is to multiply average sales per customer by average length of customer relationship.
If you run a restaurant where the average customer eats at your restaurant once per month and spends $20, the customer lifetime value might be $2,400 over a 10-year period. If you run an online store where customers spend an average of $100 per month, the CLV could be $6,000 over a five-year period.
For newly opened businesses or younger businesses, it can be harder to estimate CLV. But almost any small business can benefit from understanding the concept of customer lifetime value, and caring about the long-term revenue implications of selling to customers again and again.
How understanding customer lifetime value helps your business
If your business can get more focused on increasing customer retention and improving CLV, you might achieve bigger sales results — with lower costs and less effort spent on marketing.
Here are a few ways that understanding CLV helps your business:
- Understanding your customer acquisition costs (CAC)
- Knowing the average customer’s total spending with your business
- Knowing which products are most profitable and popular with repeat customers
- Discovering which customers are most profitable for your business
- Understanding why customers quit buying from you (“churn”)
When you know your customer lifetime value, your customer relationship management can be more strategic and precise. If your best customers spend more on a certain product, you can offer more of it, or stop selling less popular products. If you know that your average customer is worth $1,000 of sales per year, this can help you target your marketing investments — maybe it’s worth spending $500 to get a new customer that will bring $5,000 of profit to your business in the next five years.
How to increase customer lifetime value
Customer lifetime value is not just a way to describe the current performance of your business — it can help drive future growth for your sales. Here are a few sales and marketing strategies to proactively try to increase CLV.
Sell more to each customer.
If you know that your average customer buys $500 worth of products from your business, you can try to boost that number. Try to upsell customers with relevant offers for higher-priced products, or cross-sell with complementary items or services. Increasing your average purchase amount or average order value can drive CLV.
Sell to each customer more often.
If a customer buys from your business once, chances are good that they might buy again — or buy more often. Pay attention to your customer experience, customer service, and customer opinion surveys:
- Are customers having a smooth, seamless experience buying from your business, or are they running into problems and glitches?
- Do you offer email marketing campaigns specifically for repeat customers?
- Do you have a customer loyalty program to reward customers for coming back again and again?
Selling to each customer more frequently — such as by getting customers to visit your website more often or come to your store twice a month instead of twice per quarter — can drive sales and increase CLV.
Keep customers longer.
Along with increasing the average value of each customer, you can extend the lifespan of a customer relationship. Check your data for customer retention and consider surveying customers. Are you losing customers after a certain amount of time? Is your product lineup getting stale? Are your services losing relevance? Try to keep being agile at developing new products. Listen to your customers to solve their issues, and try to stay ahead of the latest shifts in your market — don’t get left behind.
Increasing customer retention can make your business more profitable in the long run than chasing after new customers every time. Every dollar of revenue in your business bank account is worth the same, whether it comes from a new customer or a long-time customer. But repeat customers tend to cost less — HubSpot data has found that it costs five to 25 times more to acquire a new customer than to keep an existing customer.
Bottom line
Understanding customer lifetime value (CLV) can help you improve your marketing, customer service, and customer retention strategies. It can even help guide your business in a new, more profitable direction — if certain customers, products, or markets are generating bigger CLV, you can focus more on your best customers and markets.
This article was written by Ben Gran from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].
