Customer Lifetime Value

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 put figures against it different metrics could be used in businesses.

Understanding Customer Relationships

Companies use the metrics such as customer life time value (CLV) to understand the importance of a certain type of customer towards the business and give a greater insight of the expected future revenue as well as expenses. CLV is the expected revenue from a customer over the course of the relationship with the customer and the company. Upon the calculation of CLV, many different factors need to be taken into consideration. Such as, contract length (how long a customer is with the company), revenue per customer, cost to acquire the customer, (also called acquisition cost), gross margins etc. In addition, the calculation of CLV will depend on the business model, strategy and other factors used by the company.

Comparing Business and Individual Customers

From the above calculations of CLV it is pretty evident that the accounting firm’s business customers have a higher CLV than individual customers. Even though the total spent on marketing campaign is twice than individual customers the return is significant higher than individual customers. Also, even with the total count of business customers is less than individual it is still unarguable than the CLV from business customers is greater than individual customers.

Strategic Focus on Business Customers

Stating the above it is clear that the firm should focus its efforts and strategies more on business customers rather than individual as the return is higher. The calculations shows that it is a no brainer that what type of customers that should concentrate on. When the following approach such as, enhancing customer loyalty, growing income/revenue per customer, enhancing customer loyalty and reducing acquisition cost is looked into that will impact CLV, the greatest approach would be enhancing customer loyalty and reducing acquisition cost.

The Value of Long-term Customer Relationships

The saying “make new friends, but keep the old. One is silver, the other is gold”. This saying 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 require new customers rather than keeping an existing one. It does not mean that business should not get new customers, it means if businesses keep a larger percentage of existing customers for a longer period, the company builds on a revenue foundation that is more profitable and easier to predict.

Building Customer Loyalty

How can a company keep a customer for a long period of time? This could play highly on customer satisfaction but this is not the only factor. It has been seen even though a customer is satisfied it doesn’t mean the customer will be a regular customer for the company. Therefore, it is important for companies to build and enhance customer loyalty. Customers who generate some kind of repeat business for companies and in hand boost the companies’ return on investment (ROI) and profitability by increasing the retention of their customers. Retaining customers is essential in maintaining customer loyalty.

The Role of Loyalty Programs

Loyalty programs for customers increase customer lifetime value by the increase in visits, increase in the amount spent per visit and as well as winning back lost customers. Keeping customers loyal and helping to impact spending decisions are strong factors why loyalty programs are influential to customers, important, and beneficial for business to have. It is also the key for the growth of the business.

It is heard by many entrepreneurs, marketing gurus etc. that it is 5-10 time costlier to get new customers than to retain an existing one. Increasing customer retention will increase the profit of the company.

Although, enhancing customer loyalty will have an impact in CLV so does reducing acquisition costs. Acquisition cost is the 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 the customer cannot be acquire profitability.

Even though customer acquisition is the cornerstone of any viable business, if you are spending too much time and money trying to lure new customers it is a downward hill for a company. 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 is important and the greatest impact on CLV but why not growing income/revenue per customer. The reason is an increase in customer retention/loyalty equal to increased/longer revenue stream. Obviously, the longer the customer relationship, the more years of revenue are delivered to the company. Reducing acquiring cost will increase your revenue and profitability.

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