What is the lifetime value of customers?
Monday, August 5, 2013/
You’ve no doubt heard again and again that your customers are valuable to your business. But do you know just how valuable they are? Can you define how profitable each customer, or each customer segment, is? And is it really important to do such an analysis?
Whilst the revenue generated from a single sale is important, “value” cannot be measured simply by the revenue a customer generates for your company. It must also include an evaluation of the costs of acquiring, supporting and selling to that customer, as well as the potential a single customer/segment represents. It takes some effort, but once you understand these factors you’ll be well on your way to determining the lifetime value of customer relationships. In turn, this helps form better sales strategies.
The concept of “lifetime value of customers” allows companies to look beyond the one big sales opportunity and understand the longer-term financial implications of the relationships companies enjoy with their clients.
Take for instance car sales: With the abundance of choice available in the market place in terms of cars and service options it can be very hard to attract and retain good customers. An enlightened car dealer principal and their leadership team would educate their whole dealership (new and used cars, service and parts teams) about the lifetime value of a customer to their business.
Mapping the touch points a customer has with their business (from initial purchase, servicing, parts, general enquiries, etc.) and making everyone in the business aware of these touch points, and their role in ensuring the customer has a wonderful experience with the business, is essential if they are to win the hearts and minds of customers.
Done well, the flow-on effect is immense – that one customer also has family, friends and colleagues they can refer to your business. That one customer, if treated well, is likely to come back over and over again.
As we have noted before, it is often easier to keep an existing customer and have them wanting to buy from you again than to attract new customers. Yet, how well do leaders of any business map and embed this customer value chain into the hearts and minds of their people let alone their customers? Not well at all, in most instances.
So how do you begin? A good place to start is looking at a formula for ‘Lifetime Value’. Peter Finkelstein, Barrett’s head of sales strategy has mapped out the following:
A formula for “Lifetime Value”
To begin determining the lifetime value of a client, start looking at both the revenues the customer generates and those that it can continue to generate each year, as well as both the fixed and variable costs associated with selling to that customer. These costs should include the cost of acquisition, support and maintenance of the account.
Often, when this analysis is done, the “value” of the one big sale (for example a once-off deal of $250,000) can prove far less significant than customers that spend $125,000 each year for three or more years.
Doing a life-time value analysis of your customer base will help you in a number of important ways:
- It can be used to reduce the cost of sale (and improve the likelihood of repeat business)
- It helps improve market segmentation so that salespeople fish where the fishes are
- It improves advertising focus because the message is targeted
- It opens up potential new segments that rivals (who chase larger deals) may ignore
Look at your whole business value chain and see where your customers are engaging with you and buying. If you map the various purchase points it can add up to be quite a lot of value residing in your customers, even those who purchase a little each time but do it a lot over the long term.
Remember, everybody lives by selling something.
Sue Barrett is a sales expert, business speaker, adviser, sales facilitator and entrepreneur and founded Barrett Consulting to provide expert sales consulting, sales training, sales coaching and assessments.