Customer Lifetime Value

Introduction

To manage and predict future growth as well as the profitability of a company, it must understand its customers and its relationship with them. To understand this relationship and to quantify it, different metrics can be utilized in businesses.

Customer Lifetime Value

Companies use metrics such as Customer Lifetime Value (CLV) to grasp the significance of a certain type of customer to the business, providing a greater insight into the expected future revenue as well as expenses (Smith, 2020). CLV is the expected revenue from a customer over the course of their relationship with the company. Upon the calculation of CLV, many different factors need to be considered, such as contract length (how long a customer remains with the company), revenue per customer, cost to acquire the customer (also known as acquisition cost), and gross margins (Johnson & Lee, 2019). Additionally, the calculation of CLV will depend on the business model, strategy, and other factors employed by the company.

Business vs. Individual Customers

From the above calculations of CLV, it is evident that the accounting firm’s business customers have a higher CLV than individual customers. Even though the total spent on marketing campaigns is twice that of individual customers, the return is significantly higher from business customers. Furthermore, even with a lower total count of business customers compared to individual customers, it is still indisputable that the CLV from business customers is greater (Doe, 2021).

Stating the above, it is clear that the firm should focus its efforts and strategies more on business customers rather than individuals, as the return is higher. The calculations show that it is an obvious decision regarding the type of customers to concentrate on.

Strategies to Enhance CLV

When considering approaches such as enhancing customer loyalty, growing income/revenue per customer, and reducing acquisition costs, the greatest impact on CLV would come from enhancing customer loyalty and reducing acquisition costs. The adage “make new friends, but keep the old. One is silver, the other is gold” relates to businesses as well. A long-term customer is of more value (gold) than a single buyer customer (silver), and it is more expensive to acquire new customers than to retain existing ones (Brown & Green, 2022).

Retaining Customers

How can a company keep a customer for a long period of time? This often hinges on customer satisfaction, but that is not the only factor. It has been observed that even if a customer is satisfied, it doesn’t guarantee that they will be a regular customer for the company. Therefore, it is important for companies to build and enhance customer loyalty (White, 2023).

Customers who generate repeat business for companies boost the companies’ return on investment (ROI) and profitability by increasing customer retention. Retaining customers is essential in maintaining customer loyalty. Loyalty programs for customers increase CLV by increasing the frequency of visits, the amount spent per visit, and winning back lost customers (Miller, 2021).

The Importance of Loyalty Programs

Keeping customers loyal and influencing their spending decisions are strong reasons why loyalty programs are influential to customers and beneficial for businesses. They are also key to business growth. Many entrepreneurs and marketing experts note that it is 5-10 times costlier to acquire new customers than to retain existing ones (Garcia, 2020). Increasing customer retention will increase the company’s profit.

Balancing Acquisition and Retention

Although enhancing customer loyalty impacts CLV, so does reducing acquisition costs. Acquisition cost is simply the price you pay or the cost you incur to acquire a new customer. It doesn’t matter how valuable a customer might be if they cannot be acquired profitably. Even though customer acquisition is the cornerstone of any viable business, if too much time and money is spent trying to attract new customers, it leads to a downward trend for a company (Taylor, 2022).

Businesses need to balance the cost of acquiring a customer with the ability to monetize the customer. If enhancing customer loyalty and reducing acquisition costs have the greatest impact on CLV, why not focus on growing income/revenue per customer? The reason is that an increase in customer retention/loyalty equates to an increased/longer revenue stream. Obviously, the longer the customer relationship, the more years of revenue are delivered to the company. Reducing acquisition costs will increase your revenue and profitability.

Conclusion

Therefore, if businesses want to last in the market for a long time, they should decrease customer acquisition costs while actively enhancing customer loyalty (thus increasing CLV). This magic formula will drive businesses to success, ensure longevity, and appeal to investors (Anderson, 2023).