The reward system for CEOs and CMOs is heavily structured toward short-term (quarterly) revenue and ROI. And the degree of success is often determined by comparison to the recent past. One of the most valuable future-looking metrics we have is Customer Lifetime Value.
The Marketing Accountability Standards Board defines it as “the present value of all the cash flows attributed to the consumer during their entire relationship with a company.” Why should you care?
CLV is critical business information for:
- Determining how much to spend on support.
- Developing products that meet the needs of your best customers.
- Assessing marketing spend to acquire a customer.
- Helping sales hone in on the most profitable customers.
- Improving efficiency by not wasting resources on non-productive customers.
One common example is the price shopper (P), who is loyal only to the lowest price, not the brand. He/she isn’t a good candidate for a repeat sale unless you can cough up another deep discount. At the same time, another customer (V) understands the true value of your product and will buy it at any reasonable price. Consider the dollars at stake if this were an automobile purchase.
Research your existing high value customers, and have the tools and knowledge to identify them during the selling process.
Customer (P) will buy a blowout special car, which he has negotiated to the lowest possible price. You’ll never see him again. Your CLV is simply the price he paid. Meanwhile, customer (V) will pay a fair price for his original car, and purchase three more during his driving career. In addition, he’ll recommend your brand to friends, family and colleagues. He’ll also generate additional revenue streams for scheduled and unscheduled maintenance. By this measure, customer (V) is worth 5 times more to the company than customer P, but both showed up as individual and equal sales in your first quarter.
So, how do you sell to high customer lifetime customers?
- Train salespeople to sell benefits – not price.
- Don’t nickel and dime your best customers. Give them something for free every now and then.
- Research your existing high-value customers, and have the tools and knowledge to identify them during the selling process.
- Guide these customers down the full path of products and services you offer.
- Know when the acquisition and maintenance cost of a customer is unprofitable and drop him or her.
To quickly understand your product’s CLV, use this simple calculator. Or put your data analyst (if you have one) to work on algorithms that might identify profitable and unprofitable customers earlier in the sales cycle.
By focusing on the lifetime value of customers, you can focus on marketing strategies that result in long-term profits, not just a sale.
To find out how computers and algorithms might be used to predict high and low-value customers, read “The Executive’s Guide to Machine Learning from McKinsey.