Customer Lifetime Value

One metric that frequently gets overlooked by most entrepreneurs is Customer Lifetime Value or CLV. I’m guessing it gets overlooked as a performance measurement because it’s not as exciting as some of the other metrics such as client acquisitions, yet CLV can be very insightful. The positive impact of increasing CLV can significantly enhance the long term profitability of your company regardless of size.

When you consider how much time and effort you have put into client acquisition, it should just follow that keeping these clients happy and returning would be a priority, but more often than not, that’s not the case. So why is that? Having been guilty of this myself in the past, I’ve come to believe that it’s mostly nothing more than habit. I say habit, because in the early days as shiny new entrepreneurs we spend so much of our time, energy and focus on finding new customers just to pay the rent and buy some groceries and we just never shift out of this mode. The down side of this habit is that we are perpetually focused on new client acquisition and never realize that at some point we can add a second prong to our sales and marketing initiatives by harvesting these existing and hard won relationships.

When you consider that it costs between 5 and 10 more to gain or sell to a new client than it does to an existing client, one would think that would be incentive enough. Couple that with increasing customer loyalty (read repeat business) by just 5% can increase your profitability between 25%-85%. Just think about this for a second. How much time, money and effort do you spend on finding prospects, convincing some them to give you some of their time and finally getting some of them to order?

Now compare that to the ease and speed at which you can resell an existing customer. Many times it’s an effortless and relaxed transaction because you’ve done all the heavy lifting the first time through and have built some trust.

So what is Life Time Value and why should it matter? CLV is simply a combination of how much a customer buys, how frequently they repeat and ideally how much profit you make on each sale. Depending on your business the numbers can range from a few hundred dollars to hundreds of thousands. For instance a bakery that sells a baguette a week to a customer every week can easily turn what is a 5 dollar sale into $250 per annum. If that same s customer remains loyal for four years, that customer is worth a $1000 to that bakery. Now compare that to new car sales whereby someone replaces a car every four years at $30,000, that customer can easily exceed $150,000 over a 20 year period.

A client I recently advised was doing 3 million dollars a year in a high margin business but was not profitable. A few questions quickly determined that they were spending far too much money on new customer acquisition and virtually nothing on client retention. They went so far as to outsource their customer service overseas because it was the cheapest solution.

Convincing the client to focus their resources on their not insignificant existing 60,000 clients required a little persuasion but by explaining that he could dramatically reduce his marketing cost against this group, his profitability should increase noticeably.

Fast forward six months and the client has reported that he is now taking a larger more regular paycheque, which has significantly reduced domestic pressures. In addition, he has managed to reduce his debt load with the increased cash flow. The only negatives he advised me of is that their sales are down slightly for the period and that he is a little bored because it’s far more intense, albeit less profitable, to hunt for new customers. I cautioned him that he can slowly turn up the new client acquisition activity but to do so only while optimizing his existing customer pool.

Finding the right mix between new client acquisition and organic growth is always challenging but by identifying opportunities to resell your existing customers will make you far more productive and fuel your profitability.

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Copyright © Greg Weatherdon 2014

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