How to Boost Customer Lifetime Value
Do you know your customer lifetime value? If not, you’re not alone.
The lifetime value of a customer is one of most overlooked business metrics. It’s also the least understood and easiest to learn.
With this prediction model, business owners are encouraged to shift their focus from quarterly profits to developing long-term customer relationships.
It’s an important metric because it sets a limit on marketing expenses when buying new customers. And it paints a more accurate picture of your return on investment for your advertising.
Once you understand lifetime value, you can begin to see the importance of repeat business and its effect on your profits.
In this post, we’ll show you how to leverage customers and turn them into lifelong fans.
We’ll also discuss how to:
- Calculate the Lifetime Value of a Customer
- Turn Repeat Customers into Raving Fans
- Prioritize Your Customers
- Boost Lifetime Value
What Is Lifetime Value?
Customer lifetime value is a prediction of the total revenue that you will receive from the entire future relationship with a customer.
The lifetime value of your customer is calculated by taking the dollar amount your average customer spends with you, multiplied by the number of times your average customer buys from you each year. Then, you take the total and multiply it by the number of years you expect to have them as a customer.
Gym memberships use lifetime value scenarios very well.
Often, they give away discounted or free enrollment because they know that they will recoup that cost over the lifetime of their customers in monthly fees.
For example, let’s say that the average lifespan of a gym member is 2 years and they spend $40 per month on their membership.
The lifetime value of a gym customer can be calculated as follows:
$40/month x 12 months x 2 years
When calculating lifetime value, make sure to also keep in mind the costs of buying your customers.
For instance, let’s say you spend $50 per lead and generate 200 leads. Your campaign costs about $10,000.
Of those 200 leads, 80 of them become customers and spend $100 each of the three times that they bought from you in the first year.
The average lifetime of a customer is 2 years.
Based on these numbers, the lifetime value of each customer is $600.
$100+$100+$100 = $300/year
$300 x 2 years = $600
With 80 new customers and a lifetime value of $600, the campaign generated about $48,000.
80 new customers X $600 lifetime value = $48,000
Take your income and divide it by the cost of the campaign and that’s a 4.8X (480%) return on investment!
$48,000 / $10,000 = 4.8
Another factor to consider is the number of referrals you will receive from a customer over the course of the years that they have a buying relationship with you.
Let’s say that 10 customers are pleased with the service that they received and refer you to one friend who buys from you.
The campaign has then generated $54,000.
( 80 new customers + 10 referrals ) X $600 lifetime value = $54,000.
Read Blog Post: How to Calculate Your Conversion Rates
Turn Repeat Customers into Raving Fans
Repeat business equals strong profits and cash flow. Without it, businesses are set up to fail because it’s common to lose money on the first few sales to customers.
Depending on the type of business, it costs 6 to 7 times more to get a new customer than it does to sell to an old one.
The way to create repeat customers is to provide outstanding service and added value.
No matter what your business sells, customers want great service. Give customers the service that you’ve promised them.
When you help people and provide solutions, you start to build a healthy customer relationship.
As with any strong relationship, take the time to get to know your people. Collect their details and treat them well. Keep in touch with them and regularly invite them back.
The primary goal with your customers is to move them up the loyalty ladder to a “raving fan.”
A raving fan is someone who helps promote you. He or she talks about your business all the time and can almost be considered a team member because they cultivate so much business for you.
It takes a lot of effort and time to move customers up the loyalty ladder to a raving fan.
You can do this by providing them a more personalized experience, where they feel like they belong.
For example, you can send them samples and vouchers, and offer them exclusive services or experiences.
There are many benefits to focusing on existing customers. It saves time, money, and allows you to predict future cash flows.
Prioritize Your Customers
Not all customers should be considered equal though.
Your time and money are valuable resources and shouldn’t be spent on people who are a major drag on your business.
There are 4 categories of clients and prospects – A, B, C, and D customers.
A Customers = Awesome
B Customers = Basic
C Customers = Can’t deal with
D Customers = Dead to your business
You probably guessed it.
Grade A customers generally spend the most money with you, refer their friends to you, and are the least disruptive to your business.
B Customers are the solid, backbone supporters of the average small business. They are price conscious but not to the point that they become a nuisance.
Grade C customers are demanding. They haggle you on price and are slow to make decisions.
Lastly, grade D customers are a nightmare to every business. This group neglects to pay their bills on time, frequently makes returns, and takes up a lot of your time for little to no return.
You’ll probably only want to focus on working with the A and B customers. If so, you have several options:
1. Move C and D customers up to the A and B grade levels.
2. Get rid of the C and D group by referring them to a competitor.
3. Change your pricing structure or return policy to weed out the C and D customers.
Grading customers is an effective tool in determining how much it will cost to buy your best customers.
Be sure to spoil the top 20% with attention and great service and spend less time with the 80% who complain about your business. It is common for the opposite to happen, and we spend so much time dealing with trouble clients that we don’t get around to taking care of our A and B clients.
The key is knowing which is which and focusing only on those who appreciate your value. You’ll see huge payoffs as a result.
Ways to Boost Lifetime Value
But, what are some strategies to cultivate the lifetime value of customers?
How do you continue to provide value and ultimately build a community of brand enthusiasts?
First, you’ll want to develop rapport. You’ll want your customers to get to know you, like you, and trust you. Then, ideally, the rapport will progress into a relationship.
Developing relationships with customers requires meaningful communication that understands, anticipates, and meets different basic human needs.
A blog is one great way to communicate with your prospects and existing customers. Its purpose is to give your contacts important and useful information about your business.
You can also use it to promote any special products or services that you offer, as well as upcoming workshops and events.
The blog serves as a valuable resource filled with targeted information. It’s also a tool for lead capture and lead generation.
The email addresses that you capture on your blog can be used for a drip email campaign, where you send out emails that can be targeted to customers based on their relationship with you.
Here, you can apply the grading customers principle to your email campaigns when segmenting your email lists.
The value you provide in emails can either be actual (specials, discounts, etc.) or perceived, meaning it includes information about an old or new product.
Largely, the type of value that you offer in your blog, and the communication channels that you use depend on your customer demographics.
In addition to blogs and emails, you can also build lifetime value with your customers through closed door sales, direct mail, brochures, VIP program offers, perceived value offers, re-booking opportunities, Deals of the Week, and phone calls.
The people who do business with you are a gold mine of opportunity. Once you know what you can spend on acquisition costs and you generate new customers, you have to figure out how to keep them coming back.
By grading your customers, moving them up the loyalty ladder, and continuing to delight them with actual and perceived value, you’ll boost the lifetime value of customers and your profits.
Want to talk through and plan out how to do this in your business? Schedule a call with ActionCOACH today!