BY AMIT MITTAL, Business Coach, Consulting & Advisory
As discussed in our previous blogs, niche stands on six pillars. We have previously covered: Acquisition cost, Five Ways, and Guarantee. Now we will discuss lifetime value.
There are two ways to grow your business:
- The first is to acquire new customers.
- Focus on retaining existing clients and increasing their lifetime value (CLV)
The most effective strategy, proven by data, for producing a profitable revenue is the second one. Despite this fact, the truth is that 44% of companies spend more amount of time and money in acquiring new customers, while only 16% of businesses focus on reducing churn and believes that it is cheaper to retain and continue to build on a positive experience with an existing customer rather than to find a new one.
Throughout the lifetime of the company, customers are continuously gained and lost. An interesting fact is that exceptional products or services can keep your customers excited and wanting more. This is what adds value to the company during the period of the relationship with customers.
Let us understand what is the value of knowing your Customer Lifetime Value (CLV)? By estimating your CLV you can determine:
- How much you should invest to acquire a particular customer and have a profitable relationship?
- What are the demanding products by the customers with the highest CLV?
- Which products have massive profitability?
- Which types of clients are the most profitable?
Answering these questions with the help of CLV can undoubtedly boost your business’ profitability.
So, what is Customer Lifetime Value?
Customer lifetime value (CLV), or the lifetime value of a customer, is the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime.
CLV is a crucial figure to know because it assists you to decide the amount of money to invest in retaining old customers and acquiring new ones.
CLV is a method to measure profit linked with customer relationships, which helps you give a figure on how much you are willing to invest to maintain that relationship.
For example, if you estimate one customer’s CLV to be around Rs. 50,000, you would not invest more than that to try and maintain the relationship. This will just not be profitable to you.
How do companies calculate customer lifetime value?
First, calculate the lifetime value by multiplying the average value of a sale, the average number of transactions made by the customer, and the average customer retention period (or the average length of the customer relationship) in years.
Lifetime Value = Average Value of Sale × Number of Transactions × Retention time
Take for example a sports clothes shop.
There is an athlete who regularly buys sportswear from you, is worth:
Rs. 8000 × 4 times per year × 10 years = Rs. 3,20,000
And a non-athlete individual who is worth:
Rs. 2000 × 5 times per year × 3 years = Rs. 30,000
Clearly, you will be paying more attention to the athlete.
The CLV must account for customer acquisition costs (CAC), on-going sales, marketing expenses, operating expenses, and the cost required to manufacture the product and services the company is selling.
Many companies overlook this valuable metric and instead optimize for a single sale in the near term. It is still vital to find new customers for the growth of the company, but improving the lifetime value of existing customers is essential for a company to sustain a feasible business model.
Data shows that an increase in customer retention rates by only 5% has been found to increase profits anywhere from 25% to 95%. Keeping this in mind, increasing the expected CLV is essential.
How to Increase Customer Lifetime Value?
A positive onboarding experience helps your customers make sure that they have made the right call. That ultimately helps you to retain them.
The top two reasons that customers hesitate to make a deal is
- They are unable to understand the product you sell
- They don’t gain any value from the product
Customer onboarding can solve these problems. To build a solid onboarding experience that is easy and quick make sure you understand your customer first. Set clear expectations for the product they are going to purchase and reemphasize the value it will provide. Make it a personalized experience for them. A greeting message or a call, specialized training, or documentation including interactive videos and tutorials will be valuable here. Stay in constant communication with your customers and help them fulfill their goals. Your every interaction with them should be the same optimistic experience that made your customers sign up initially. Finally, be with your customers every step of the way and celebrate small victories.
Keeping this in mind, you will be able to build a more profitable and successful business just by focusing on engaging and retaining long-term customers who will ultimately become your promoter along with being repeat buyers.
We at MADASKY, business coaching believe the problems and the solutions go hand in hand, while there is a problem, a solution is a hope that is available and accessible in abundance to all who need it. Once you have selected the strategies for your business, we will work on implementing them together and Testing and Measuring the results. Our objective will be to reduce acquisition costs and increase the lifetime values of your “A” grade clients to your business.
Reach out to us and we will help you to overcome your business challenges and grow.
MADASKY Consulting, Business Coaching, Consulting & Advising.
Visit us: www.madasky.com
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