Increase the lifetime value of your customers.
- The initial sale.
- Product replacement at average end-of-life timeframe.
- Annual fees or subscription costs.
- Add-ons like extra features.
- Regular services.
- Upgrades to the original purchase.
Most customers pass through several business departments on the customer journey, including marketing, sales, and client success. Integrate all of the data from these departments for a holistic image of the profit and cost associated with each customer.
Use the compiled data to calculate customer value within one year, using the formula:
Customer Value = (Average Value of Sale x Number of Transactions) - Cost of Acquiring and Servicing the Client.
This calculates the customer’s profit margin, or the amount of money your company has made on the customer after taking into account all expenses of doing business with the client, in the first year.
The data previously compiled will help determine the associated marketing expenses, sales costs, and time spent by employees to secure and maintain the customer’s business. For example:
- Average value of sale = $100
- Number of transactions per year = 12
- Cost of acquiring and servicing the client = $1,000
- Customer value in first year: ($100 x 12) - $1,000 = $200
Find the expected Lifetime Customer Value (LTV) by calculating
LTV = Customer Value per Year x Average Customer Lifespan.
- Customer value per year = $200
- Average customer lifespan = 5 years
- LTV = $200 x 5 = $1,000
Adjust for customer churn rate by calculating the Churn Rate =
(Customers at Beginning of Period - Customers at End of Period) / Customers at Beginning of Period.
- Customers at beginning of period = 100
- Customers at end of period = 75
- Churn rate = (100 - 75) / 100 = 25%
Churn rate can be used to understand the loyalty of customers. If you have a low churn rate, this likely indicates that you have customers happy with your brand or product. A high churn rate does not necessarily indicate a problem, but is data that you should keep track of. Reducing the churn rate can be one way to increase LTV.
Ways to increase LTV include:
- Retargeting: Re-engage customers who have had previous experience with the company or business in the past.
- Optimizing onboarding: Ensure customers have a pain-free, quick, and simple onboarding process.
- Communicating: Whether your customer is having a problem or not, keep the line of communication open so that they know you are there to optimize their experience.
- Incentivize loyalty with a rewards program: Reward your customers who stick with your business and keep them coming back.
Retain all the data that the company acquires across each business department, no matter how trivial the data may seem. Any data collected informs on some aspect of the business and can be used later to understand historical changes, compare recently acquired data, and help teams understand potential improvement points that may be overlooked at the time of data collection.