You may have come across customer lifetime value (ltv) before...
But did you know it is one of the most important parts of
maintaining a sustainable and growing business.
You also may have heard of ‘customer is king’...
And they are King if you treat them well over years as your
profits will soar.
If you’ve heard of the phrase ‘scaling up’ then it is based
on increasing the scale of your business in a sustainable way as you have a
formula to look after a greater amount of customers.
(You can even estimate at which point you can start looking
for that new car or holiday you always wanted with ltv analysis)
What is Customer Lifetime Value (ltv)
It is simply: ‘what is the customer worth to you over their
lifetime of doing business with you’.
(Even though you knew, it’s good that we got that out of the
way)
If you are a good company that keeps customers and clients
happy, then you should be able to maintain repeat business. If not, then you
will always have to rely on new business to sustain the business. Every morning
and every week is a brand new slate.
When instant business setups (who just focus on one-off
transactions sales) are struggling to find new customers that week, they may do
unprofitable things such as over promise which means too much time spent on
servicing the customer; or offer a huge discount which is close to making an
offer at cost price.
Repeat business vs instant sale (one-off new business
transactional businesses)
The repeat business type focuses on keeping a portfolio of
customers who will come back to them to use their products and services
regularly. In order to do this, there are three main ways:
1.
The emphasis is on building a good trusted
relationship.
2.
Feedback loops so you can understand the ongoing
needs of the customer better.
3.
Regular consistent contact with your customers
Businesses that focus on the instant sale are a lot less
relationship focused. The aim is to take the order. After this, some instant
sale businesses are not really too bothered about the customer after the
purchase.
Although, you will find some excellent instant sale
businesses that do focus on making sure the product or service matched the
customer’s expectations and can gain referrals from those they just sold to:
these are owners who know how to create a steady business by focusing on
long-term stability and good reputation.
Unless you have an enormous market that you and your
competitors are struggling to fulfil the orders for, then in an instant sale
business setup you will be living one-day-to-the-next. If competition becomes
really fierce, cash flow can be severely tested.
On the flip side, a good repeat business setup usually has a
customer database that place orders on a regular basis, so cash flow is more
predictable than instant sale business setups.
Repeat business setups grow the quickest
If your business focuses on building relationships and
offers that gain repeat business then you will likely grow.
In fact, you can possibly predict pretty close to how your
business will grow 6 months or even 2 years from now.
Referrals
Having a business that pleases customers over-and-over again
will lead to referrals too in the long run.
This means a stream of new repeat customers. And even better
for you, a huge saving in pre-sales acquisition costs on promotion and sales
costs, so these customers are even more profitable for you in the long run.
How to calculate return on investment for ltv
Let’s say your product xxx costs the customer £100, and they
buy 3 times a year. Over ten years that’s £3,000 of takings.
The upfront promotion costs of advertising and pre-sales
(staff, business cards, leaflets, events etc) equal to a one-off £50 per
customer.
Then you have an account manager with other business costs,
and product costs which equal £30 for every time they buy a product.
So total earnings are: £3000
Total costs are: £50 upfront + (£30x10) = £350
The lifetime value is £3000 - £350 = £2650 profit over ten
years.
The only way to keep a customer for ten years is to meet
their requirement for customer value
What is customer value, and how do you use this to scale-up
sales revenue?
Customer value is the basis of marketing strategy.
In a nutshell: to find the needs and wants of the customer
so that you can create a product or service of value which they are willing to
pay for.
Even if you are an instant business set-up, or sell products
that don’t get replaced for a number of years, focus on generating high
customer value; the best in your niche.
Once you have sold your product, look at high value add-ons
such as other related products or service contracts to create a steady income
stream. Eg, if you sell cars, why not do a deal with a top MOT service station that
can provide annual service, tyre checks, and in-car entertainment: offer these
add-ons to your existing customers, even if it’s just referrals.
Over time, your business has to find out what is customer value on a
regular basis, even if they have been with you say for 3 or 5 years. The
industry you work in can change very quickly so every-so-often the customer’s
perception of value can change. If this does happen you want to prove you are
up-to-date. If not, then even repeat customers have a look down their vendor
list to see how other vendors compare and what they can offer.
Let’s look at two exceptional businesses that operate a
large scale with millions of repeat customers.
Heinz Beans for example will not have an account manager.
But they’ve spent years on understanding customers’ tastes so that the beans
taste great when customers eat them.
Amazon will track what products you view and give you plenty
of products similar to your searches so that you can see the whole of the
market – and of course Amazon gets to cross sell you too when they email you
new products on the market.
How much will the above ideas be worth to your business if
you improved the ability to increase the amount of repeat sales you get from
customers over the years?
Can you draw up one new product to cross-sell or up-sell
that is of great value to your customer base? If yes, then do it this week!
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