We have often referred to CLV or LTV (Customer Lifetime Value/Lifetime Value) as the most secluded key performance indicator, which is particularly difficult to handle as this metric is a forward-looking indicator which identifies both the customer’s upside potential along with customer-centricity of a business, and can be a medium for finding a boost in customer retention, customer share, improvement in ROI and top-line revenue.
An Unexplored Business Development Opportunity
We are all aware that growing and retaining existing customers costs much less than acquiring fresh ones. However, for several reasons, sales professionals often show an inclination for acquiring new customers and defy existing customers as they provide incremental sales as opposed to fresh customers which bring (first-time) big-ticket sales.
Nevertheless, it is necessary for the management to recognize that incremental sales from existing customers may deliver lower value, but on the other hand brings higher margins per sales, increase customer share, and boost Customer Lifetime Value- a metrics that often fail to catch the attention of the sales teams but nevertheless is vitally important for the company.
Defining CLV (Customer Lifetime Value)
To start with MASB (Marketing Accountability Standards Board) defines CLV as the current value of the future cash flow attributed to the customer during their total relationship with a brand or a company.
The math behind Customer Lifetime Value looks like the following:
CLV= Profit in $* Customer Retention (%) / (1+ Product or Service Discount (%) – Customer Retention (%))
So if your business makes an average profit of $ 10,000 from the customers, and your customer retention is 80% and the discount rate is 20% your CLV is as follows:
Customer Lifetime Value= $10,000*80% / (1+20%-80%) =$8000/40%= $20,000
Moreover, an add-on factor when calculating CLV is referred value. Customer Lifetime Value should reflect the measurable benefit for all the existing customers those that have provided referrals which provided incremental sales.
Questions on Customer Lifetime Value
CLV defines the financial value of each customer in your CRM database and this information is capable of answering certain strategic questions and which can be applied to a number of use cases.
What is a lead worth?
When you have the right CLV and understand your organization’s lead-to-customer conversion rate you can easily measure what a lead is worth using easy to use CRM software and thereafter also calculate how much your business should be willing to spend for acquiring new leads.
In addition, marketers who fail to apprehend their businesses’ CLV mostly either overspend or underspend in marketing acquisition costs (which is the cost per lead) and possibly also fail to spend correctly to retain and grow existing customers.
Are all your customers equal?
In business be it big or small, it is always a good strategy to treat every customer differently. Now if you are able to segment the customers in your CRM database according to the profits they generate for your business you can operate your business smartly by delivering higher levels of support and service to the customers that are more profitable and thereby keep those customers for a longer period of time.
This can only be done by developing a CLV growth strategy for your business using an easy to use CRM software platform, to assist you in your path of rapid business growth.
What is the customer potential in your business?
By segmenting your customers according to their CLV potentials, your marketers can create more relevant campaigns and thereby generate more predictable results.
For example, if you are using an easy to use CRM software and is capable of identifying customers that fall both in the high CLV but low customer-share segment it suggests the biggest untapped potential for your company.
Segmenting your customers also allows more personalized, contextual and timely delivery of your campaigns to increase CLV and customer share for your brand.
It must be noted over here, that increase in CLV even by a few percentages can have a tremendous material effect on revenue and earnings of your company.
While still today most business establishment measures customer profit, which is a historic indicator for evaluating growth in businesses, CLV is the best metrics for predictive analysis that is capable of forecasting future value of your company’s business growth.
Finally, CLV also tends to acknowledge and recognize relationships with your customers as assets, which aids in repositioning your businesses’ focus from short-term profits to long-term relationships, and compliments many other customer-centric indicators found in easy to use CRM software platforms like Customer Loyalty, Customer Satisfaction or Net Promoter Score (NPS).