Customer or Client Lifetime Value has a central strategic importance for any business as it allows business owners and management to discover more and more about their most important asset – their customers or clients.
There are a number of important reasons why a business should know the value of each individual customer or client and the best way to understand their value is to examine that value over the whole period of a customer or clients lifetime with your business or brand.
It allows the business to analyse where the customer came from, the demographic profile of that customer, what they have purchased from you, their propensity to purchase from marketing messages and mostly importantly, how much money they have spent with your business.
I will use a motor company who do servicing and MOT as an example.
When the motor company analyse their total database of customers they will see when the customer first visited them and when they last visited them, along with a list of all work carried out and the cost of each job.
When they add up the complete individual customer spend they can work out customer lifetime value e.g. Bob Smith has been a customer for four years and has spent £1,200 with the company.
They can also work out the total customer spend divided by number of jobs carried out to create average customer spend per job. In the same example Bob Smith visited four times and spent £1,200 so an average of £300 per job. He seems like a profitable customer.
As part of this analysis the company should also be looking at the ‘buying status’ of each individual customer. Have they expired e.g. not visited in the last three years despite marketing communication; have they lapsed e.g. not visited in the last 18 months or are they active customers.
This allows the company to get a basic understanding of which existing or past customers have been the most beneficial for their business. More often than not 80% of a business’ revenues or profits typically come from a handful (20%) of their customers. This is the first level of customer segmentation.
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