Why customer lifetime value matters

Written on 29 August, 2016 by James Baylis
Categories: General Wholesale

Customer lifetime value is one of the most important metrics to identify where your business is now, and more importantly where it will be in the coming years.

Knowing your customer lifetime value allows you to better strategise your digital marketing campaigns, as you'll learn who your best customers are and how you can find more of them.

What is customer lifetime value?

In a nutshell, customer lifetime value is the amount a customer spends during their lifetime with your business. Customers were not all created equal.

The pareto principle (better known as the 80/20 rule) states that 80% of sales come from 20% of customers.

To further back this principle, recent studies show that the top 1% of customers are worth 18 times more than the average customer:

(Source)

Once you narrow down your business's 20% of top customers, you'll gain better insights about your top target demographic, and be able to use data to find more high converting customers.

Creating new audiences from your top customers

Facebook allows businesses to upload their customer email addresses to match them into an audience to serve ads to:

Its lookalike feature takes things one step further by taking your customer list and creating a new audience of Facebook users who match similar interests and behaviours as your customers.

Now imagine if you segmented your customer list only to include the top 20% of customers, and used lookalike audiences to target new prospects who match your top customers.

Simply knowing your customer lifetime value gives you a better opportunity to acquire new customers who are likely to spend more with your business, increase your marketing ROI.

You won't survive without customer retention

A business that doesn't work on improving their customer lifetime value is a business that will struggle to succeed. Studies reveal that it costs companies 7x more to acquire a new customer than keeping a current one.

Customers who have made a transaction with your business don't need further convincing that you're the right brand for them, making them easier to sell to.

Retaining customers can be done through loyalty programs, great customer service, special offers, free returns and a great customer experience.

The customer experience part is enormous, with Walker stating that customer experience will be more important than product and price by 2020:

(Source)

And what's the number one reason for customers leaving a business? Level of treatment received (a poor customer experience):

(Source)

Most businesses focus on the acquisition side of their marketing and neglect the retention side, even though the later is more profitable.

A report by Econsultancy found that 40% of businesses focus more on customer acquisition than retention:

Winning new customers is important to grow your business, but once attained if you're not doing all you can to maximise their CLV, your acquisition efforts will be in vain.

There are many levers a business can pull to maximise their marketing ROI, most tend to look at the front-end (website optimisation, audience targeting, marketing channels) to improve their numbers.

Very few actually take the time to learn their CLV and how they can improve these numbers to grow their business.

Do you know the average lifetime value of your customers? If you don't, get in touch with us today to find out.