Why you need to work out your customer lifetime value

June 8, 2020
Customer Lifetime Value

Have you ever considered what a customer’s lifetime value is to your business?

This important metric helps you to get a clear understanding of the total revenue your company can expect from each customer. When you measure this against how much you spent to acquire that customer, you can work out how long it would take you to recoup that investment.

But what about return on investment?

Return on investment used to be the bee's knees. And obviously your ROI is still a great indicator of how effective your marketing strategy is. But it has its limitations. Generally, when we measure ROI, we look at each marketing strategy or what our business brought in over an entire financial year. This gives us a figure that we can then use to assess our approach, fine tune it for next time (if it wasn’t a huge win) or give ourselves a high five if it was. If we look at individual customers, we might see that one brought us $330 in revenue while the other brought us only $150.

But when you only look at ROI, what you miss is the overall revenue each customer has brought in across their lifetime. Maybe the person who only invested $150 initially has actually spent an additional $150 with you each month for a year. And perhaps the one who spent $330 straight up hasn’t made any further purchases. What we know about this person who loyally continues to spend with you on a regular basis is that they are likely to be a raving fan. This increases the likelihood of them telling their friends about your products and generating further sales through word of mouth. This is one reason why loyal customers are worth pursuing.

So how do you make the most of your customer lifetime value?

What’s so great about your customer lifetime value is that it forces you to take a long term strategy by focusing on the relationship you build with your customers. Essentially, you want less one hit wonders and more raving fans. The ones who come back to you again and again (while telling all their friends about you too). In this way, working with your customer lifetime value goes well beyond simply measuring the total revenue against how much you spent to acquire them.

When you’re first working with your customer lifetime value, you want to try to identify promising customers. From there, you want to segment them by looking for key pyschographic and demographic characteristics. Remember to only look for the ones that are relevant to your business. For example, you may identify your ideal customer demographic as being female, between 30-45 years of age and with a household income of $70k+. One of their psychographic attributes might be ‘busy and looking for a quick fix or something to simplify their life’. Essentially, what you’re doing is creating a customer avatar that helps you to better understand how to market to your ideal audience. With this profile in mind, you can then set about testing messaging and marketing approaches to see what works.

Working out your customer lifetime value can help you to identify:

    • A guideline on how much you should be spending on marketing in order to secure a customer
    • How to tailor your products and services to ideally suit your best customers
    • An estimate of what you should invest in customer care and experience to service and retain your customers
    • Who you are best off targeting the majority of the time to increase your revenue

So what are you waiting for? Get cracking on your customer lifetime value and mine this incredibly powerful marketing tool to foster long-lasting and lucrative relationships with your customers! The best bit is it will keep them happy too.

Like this? You may enjoy this article on how to use marketing psychology to influence buyer behaviour.

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