Why Customer Lifetime Value is the Most Important Measurement in Your Business
Why Customer Lifetime Value is the Most Important Measurement in Your Business
When I ask, all the people that I meet in business, if they know their top 10 customers, most proudly announce that they do. Then, when I then ask who their top 10 most profitable customers are, it is normally a very different look. Do you know? And why would you care? This article explores the importance of knowing the lifetime value of your customers and how to calculate it. This way, you can spot trends as they happen, and make the most from them.
How do you calculate your profitability?
You will need to apply some simple accounting rules in relation to fixed and variable costs. Stop yawning and stick with me, since this is important. OK, maybe you have a good accountant; they will be able to help you out – if not, get a new one!
To calculate your fixed costs, look at all the items that you spend money on every year. Things like; rent, light, telephone, salary costs, etc. When you have the total, then divide that by the amount of customers you have, and that is the amount you will assign as the fixed cost to each customer.
To calculate your variable costs, you will need to add up the cost of goods sold. Items such as; material costs, variable manufacturing costs, sales commissions, lead generation costs, service costs, etc.
This will give you a total cost of doing business, and what most companies do, is apply the variable costs the same way as the fixed costs and calculate an average margin. For example if you had turnover of €100, and your fixed costs were €30 and the variable costs for the year were €40, your margin would be €30 or 30%.
How do you calculate individual customer profitability?
You have your average margin, what you now need to do is to divide your customers into groups. Suggestions would be as follows;
* Top 5 revenue earning customers
* Middle 5 revenue earning customers
* Bottom 5 revenue earning customers
* 5 customers in each industry
* Additional metrics may include
o Location
o Number of employees
o Sales representative looking after them
o Products they buy
Once you have your rankings, then try and apply the above calculations to each segment. Apply your fixed costs as a proportion of revenue each customer generates.
Now apply the variable costs to each customer segment. Some products may cost more to produce. Some locations may cost more to service, and some of your larger customers may seek larger discounts, which can all eat into your margin.
Calculating the lifetime value of a customer
Once you have an average profit per segment, you can create the average profit per segment. Just by getting this far you will have obtained huge insights you’re your customer base.
You will finally need to look at how long your average customer stays with you, and how much they buy. So say customer X, has been with you for 6 years, has spent €500 with you, and the margin has been 20%. That means the customer has generated €100 for your bottom line.
That is the secret to successful business – knowing the lifetime value of a customer.
Now you know the Lifetime Value – what next?
Whatever the answer you come up with, you now will have the secret to multiplying your profits. Select the groups that deliver you the most lifetime value. With this information you can do the following.
* Work out how much you are prepared to spend to get a new customer that will deliver you €100. Use this as the basis of your marketing plan
* Love your existing customers in those segments, and continue to sell to them.
* Identify the least profitable ones, and either relinquish your attention on them, or find ways to increase the value they deliver to you.
* Use the information gained, to target your marketing and lead generation activities on similar types of prospects.
* Ask each one of them for two referrals, after all, since they are giving you so much profit, they must be happy!
The above exercise is one that should yield you massive returns on the time spent. However, once completed, you should seriously consider putting in a system, which tracks this information as you go on. This way, you can spot trends as they happen, and make the most from them.
This article is one of many sales and marketing articles written by Peter Lawless of http://www.3r.ie – Marketing Consultant delivering Marketing Strategy & Online Marketing, Sales Trainer, and Public Speaker.
Driving Customer Equity : How Customer Lifetime Value is Reshaping Corporate Strategy
In their efforts to become more customer-focused, companies everywhere find themselves entangled in outmoded systems, metrics, and strategies rooted in their product-centered view of the world. Now, to ease this shift to a customer focus, marketing strategy experts Roland T. Rust, Valarie A. Zeithaml, and Katherine N. Lemon have created a dynamic new model they call “Customer Equity,” a strategic framework designed to maximize every firm’s most important asset, the total lifetime value of its c
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Review by charles colby for Driving Customer Equity : How Customer Lifetime Value is Reshaping Corporate Strategy
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Many marketing executives are challenged to evaluate the impact of their marketing communications and customer relationship strategies, but too often get bogged down in short-term measures like click-throughs and direct response. Driving Customer Equity is a valuable tool for quantifying the long-term impact of investments in building a brand and improving customer satisfaction. It is based on a logical framework that recognizes the financial returns from building brand equity, improving perceived value and increasing customer satisfaction. The book does more than provide a useful framework and report real research. It also includes hands-on tools that can be used by managers, consultants and researchers. I am recommending this book to all of my clients in the hope that it encourages a long-range focus that recognizes building customer equity is more important than short-term sales.
Review by Tor W. Andreassen for Driving Customer Equity : How Customer Lifetime Value is Reshaping Corporate Strategy
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I approached this book as a heavy consumer of marketing literature in general and customer lifetime value literature specifically. Based on previous readings my expectations were low. However, the book’s basic messages pertaining to customers not products, services not products, identifying the three drivers of customer equity and finally, how to estimate the numbers fascinated me. Through Customer Equity the reader can learn about some of the fundamentals behind what drives a company’s profitability. CEOs are not concerned about the 4P’s of marketing. Their focus is on the overall recourses allocation in order to secure future revenue from current and future customers. This book recognizes this and provides the reader with a roadmap to the allocation of the marketing budget among three main drivers of customer equity, i.e. brand equity, value equity or retention equity. Customer Equity provides the reader with sophisticated tools to estimate the financial consequences of the alternatives before they are executed. The ability to estimate the impact of improvement in any of the three areas on customer equity, will in my mind regain marketers access to the CEO -an access they lost to finance and strategy in the 1980s. In an era influenced by customer relationship management thinking, Customer Equity is a must reader for enlightened managers.
Review by for Driving Customer Equity : How Customer Lifetime Value is Reshaping Corporate Strategy
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This is a very insightful book that makes you think about different approaches to a traditional problem. How do you continue to grow your company and increase your profits? The authors focus on Brand Equity, Retention Equity, and Value Equity. They suggest new ways to think about and manage your company to make sure you are focusing on the right things in this new high speed marketplace. This is an important book for any marketing professional who wants to stay abreast of the latest thinking and strategies to increase customer retention and value.
Review by Dan Michaluk (dan.michaluk@experiencepoint.com) for Driving Customer Equity : How Customer Lifetime Value is Reshaping Corporate Strategy
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By presenting a simple yet powerful organizing framework linking marketing tactics to customer equity, this book helps marketing professionals understand HOW to execute a customer focused marketing strategy. It is practical and highly useful from start to finish. In addition, it is approachable yet deep enough to appeal to those looking for a strong start into this subject area.The text is concise, with a balanced use of graphics and case examples. Each chapter concludes with a “Key Insights” and “Action Steps” summary. Time-pressed readers will find the style suitable for quick reading.Dan Michaluk is a simulation designer for ExperiencePoint, creators of award-winning business simulations.
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This book is an eye-opener. In practical, non-technical terms, it shows how corporate strategy (and especially marketing strategy) can be based on customer lifetime value rather than product profitability. It brings strategy in line with the latest thinking in customer relationship management (CRM). The ideas about making all marketing expenditures financially accountable are fascinating, and the book suggests how this can be accomplished through the concept of customer equity. Also, every company is trying to make the internet count, and this book shows how different internet marketing efforts can increase customer lifetime value in different ways. Some people at old-fashioned companies may have difficulty grasping some of these new ideas (which are rooted in the new economy and customer relationship management) but to progressive executives this book will look like the future of strategy.