How do the brands you shop with know when to send you a coupon or a targeted ad? When you get a discount offer in the mail, do you think it’s sent to every customer, or is it intended just for you?
By reading this post, you will learn the basics of customer lifetime value and why it's an important tool to measure and monitor your customers' behavior as they interact with your business.
Decoding Business Variables
As a business owner, there are many variables you must consider to keep your business thriving. Some of these are within your control, like how much work you put into your business, the price you charge for your products or services, and the number of employees you hire.
Depending on your business, you can even contractually control how your customers interact with your business.
Contracts vs. Customer Whims
A car leasing company can count on its customers making payments every month. Why? Because they signed contracts that say so!
On the other hand, a customer spending $200 at their local grocery store last week doesn’t ensure they will make the same purchase next week. They may never even return to that store ever again - especially if they had a bad experience.
So how do grocery stores and other non-contractual companies who cannot predict their customers' future behavior go about making long-term decisions when they are so reliant on something that’s out of their control?
Customer Lifetime Value
It’s how grocery stores keep you as a paying customer. It’s how art galleries price their art. It’s how marketing directors decide how much to pay to acquire a new customer.
Understanding Customer Lifetime Value (CLV)
Customer Lifetime Value is an analysis that provides you the expected total revenue to expect from each customer based on their historical behavior including their purchasing frequency, how recently they visited your business, and how much they tend to spend during each visit.
Turning Gut Decisions into Metrics
CLV is a powerful tool as it allows companies that lack contractual arrangements with their customers to make long-term decisions as if they did, moving what’s usually a gut-based decision into the quantitative world, making it measurable and reliable.
Tailoring Offers to Your Habits
For example, let's say that you buy toilet paper once every three months. It’s coming up on your third month, and you haven’t bought toilet paper yet. If your grocery store is using CLV effectively, they will be tracking your purchasing frequency and since they don’t want to lose your business to a 7/11, Target, or some other competitor, they will send you a $3 coupon to retain your business.
Artful Pricing Strategies
If an art gallery utilizes CLV, they will know how often their patrons purchase their art and they may decide to adjust their prices if certain paintings are hanging on the walls for too long.
Marketing Wisdom from Customer Data
CLV can also inform how much money should be spent to acquire a new customer based on the behaviors of existing customers. This is an area that is especially important because often marketing spend is decided by simply observing the average revenue per customer minus the average price to acquire a customer. However, averages hide significant potential; if your average customer spends $100, limiting your spend to $100 may leave you blind to the $1,000 customers that would be receptive to your campaign.
Additionally, CLV is used to inform which marketing channels attract new customers. A company might decide to use social media campaigns instead of newspaper ads if their highest-value customers have historically been acquired via social media.
Customer-Centric Decision-Making
Customer behavior should be the main driver informing your decisions as a business owner. If you’re not paying special attention to how your customers interact with your business, you may be missing out on significant growth opportunities. Over time, your high-value customers might choose to shop with a competitor who is actively tailoring their services to match their needs.
In Conclusion
The best way to anticipate your customers' future behavior is by carefully analyzing how they currently behave and how they have behaved in the past. This is the power of Customer Lifetime Value. It's easy to start employing CLV in your organization - get started today!
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