Customer Lifetime Value has a central strategic importance for any business as it allows entrepreneurs and leadership teams 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.
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
- How much money they have spent with your business.
I will use a photographer who provide commercial photography services to their clients.
When the photographer analyses 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 photography projects carried out and the cost of each job.
Working out Customer Lifetime Value
When they add up the complete individual customer spend they can work out customer lifetime value e.g. Valley Insurance has been a customer for two 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 Valley Insurance had two pieces of photography work carried out and spent £1,200 so an average of £600 per job.
They look to be 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 booked any photography work in the last two 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, using the Pareto Principle, 80% of a business’ revenues or profits typically come from a handful (20%) of their customers.
This is the first level of customer segmentation.
About The Author
Mark Pettit helps successful entrepreneurs create a vision of their ideal future and then build a plan and path to create it. By having this clarity, his clients are able to expand their freedom and multiply their revenue and growth.
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