Customer Lifetime Value

When you understand the value of your customer/client over the lifetime of your business relationship with them, you’re better positioned to organise and budget your acquisition activities.

Strategic business leaders have the benefit of understanding the bigger picture.

Tactical business leaders don’t recognise Customer Lifetime Value (CLV). They look at the cost of acquiring a customer in relation to just the first transaction that the customer makes.

Let me give you an example:

There are 2 restaurants in neighbouring suburbs, both serving excellent meals with fresh produce.

Business A is run by a tactical leader, Tony. He’s a short term thinker and has blinkers on when it comes to marketing his business. He also doesn’t know how often customers will come back to dine, after their initial visit.

Tony wants more customers in the door, so he decides to run an Internet advertising campaign with an exclusive special offer available to new customers only. At the end of the campaign cycle, he calculates the cost of advertising, the discount offer he included in the ad and the cost to feed/serve the customer - the total cost to acquire a customer amounted to $200.

The customers who dined on Tony’s special offer spent on average $150 each, so there was an upfront loss of $50 per customer. Tony saw this result and being a short-term thinker with no understanding of CLV, he cancelled his advertising and went back to the drawing board. In his mind, until he finds a better way to market his business, he won’t be able to settle. This will cost him more time, money and effort, and cause more ongoing stress for Tony.

Business B is run by Barry. He’s strategic. He understands CLV, he understands that he must think about running his business for sustainable ongoing success.

Barry saw Tony’s ad and decided that he wanted to try an advertising campaign for his business too.

Using a similar offer available to new customers only, Barry ran the ad online and sure enough he also had new customers dining at his restaurant and redeeming the special offer. Sure enough the local customers also spent on average $150 and the offer also ran at an upfront loss of $50 per customer.

But being a strategic leader, Barry knows he serves his customers (on average) 4 times per year.

He also knows that once he has a customer’s details (that they need to provide to redeem the offer), he can re-engage that customer with email marketing that costs him little more than 30 minutes of his time. Nothing in comparison to the cost of the initial Internet ad campaign.

He knows these customers (on average) spend $150 per transaction. From each subsequent transaction, the profit margin is 50%.

This means that over the course of 12 months, the customer will spend $600, generating $175 profit for the business.

Barry also knows that because this advertising campaign is generating profit for his business, he can double-down on his investment an expand the reach of the campaign to acquire more and more customers and keep the snowball building.

Bottom line is it pays to be a strategic thinker.