Meta Leadership Primer: Customer Lifetime Value
When you have a business, no matter how big or small, you know that you need to pay attention to critical metrics. And one of them is customer lifetime value.
What Is Lifetime Value of a Customer?
Simply put, customer lifetime value is the total worth of a customer to a business during the period of their relationship.
While many have derived all types of metrics and KPI’s (Acquisition costs, Activity cost chains, and others), measuring the lifetime value of a customer can provide you with insights that put you in a much better position to succeed.
As you most likely know, the customer acquisition cost tends to be extremely high. This is why most companies make concerted efforts in the areas of customer retention and service. After all, the cost of keeping your existing customers is a lot lower than it is to get new ones. As the old saying goes “It’s cheaper to keep her”.
How To Measure Customer Lifetime Value
I have spoken to the importance of customer lifetime value and with good reason. Even though this metric is widely known and well understood by most large organizations the fact remains that in smaller businesses this goes largely uncalculated. So, they end up dealing with the costs of randomized marketing, inadequate systems, and segregated teams. Basically, inefficient operational functions as they relate to the customer cycle.
There are numerous models and formulae for calculating this some a lot deeper than other but for a quick and dirty you can use the following:
1) How much does it cost you to acquire 1 customer (AC)?
2) What is the average transaction value per customer (TV)?
3) What is the average number of transactions per customer (TPC)?
4) What is the average lifetime of that relationship, usually in years(L)?
So, it’s as follows: Lifetime Value = ((TV * TPC) * L) — AC.
Example: if it costs you $100 to acquire a customer and each customer stays with you on average 5 years. During those 5 years they average 10 purchases per year at a value of $25 per transaction. The equation would be as follows:
1) $25 * 10 = $250
2) $250 * 5 = $1250
3) $1250 — $100 = 1150.
So, your average Lifetime Value of a Customer = $1150.
Yes, there are models that get much granular dealing with the customer support costs, discount rates (promotions and specials) and on. But those are beyond the point I am trying to get at here. Which is the financial measure of why keeping your customers is more beneficial. That needs to be understood by leadership and definitely passed down to all of the staff involved in customer facing activities.
Learn more about this as well as “Next Practices” in Meta Leadership
Visit Michael Stattelman for even more….
Why Is the Customer Lifetime Value So Important For Your Business?
While customer lifetime value seems to peer over into accounting, all you need to understand is that it represents the overall or aggregate value of each customer, during the lifetime relationship with you.
By completely understanding the customer experience and by measuring all of the feedback that you are getting as well as taking into consideration your touchpoints, you will be able to understand what drives the customer lifetime value and even more so provides insight into ways and means to put efforts into enhancing it by one of the following:
1) Increase value per transaction.
2) Increase frequency of purchases
3) Increase the lifetime of that relationship.
All businesses would love to be able to do all 3 simultaneously but the reality is more often than not resource constraints will prevent this.
So now you know, even if you were aware of this already sometimes refreshers can give us another point of leverage in the direction of organizational optimization. That’s what Meta Leadership is all about.
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