Customer Lifetime Value allows a business to analyze the entire value of a customer over its lifetime and therefore reinforces the importance of retaining customers. This metric considers retention rate, current cash-flow, and future value while taking into account profit margins. Therefore there are three ways to increase your CLTV, keep customers longer (increase retention rate), encourage customers to spend more money now (increase current cash-flow), work to upgrade customers in the long-term (increase future value).

How to Embrace Customer Lifetime Value (CLTV) as the Key Success Metric

Customer Lifetime Value (CLTV)

All three ways to increase CLTV are important, valid, and are NOT mutually exclusive. You can work on all three metrics simultaneously through different strategies and therefore increase your overall profits over time and work toward a sustainable business.

Shift Focus from Short-term Profits to Long-term Relationships

In today’s instant-result culture, it is difficult to justify actions or investments that do not offer a short-term ROI. CLTV allows you to quantify future profits by considering the money you will make over the entire customer’s lifetime which as a result makes your business more sustainable in the long run.

Brings Attention to the Cost of Turning Prospects into Customers

The cost of acquiring a new customer is usually one of the largest business expenses. This is because, in order to gain a new customer, a business spends money on advertising, free sampling, new product design, customer service, etc. All of these expenses are executed before a prospect becomes a customer and actually spends money. Once a customer leaves, this recruitment investment becomes obsolete. If a customer spends less money on the business than it cost to attract them, the ROI is negative. When a business owner starts to evaluate this, retention efforts become extremely important to boost the longevity of customer relationships.

Importance of Upgrading Customers over Time

As customers mature over time, their needs change. Let’s talk about the car market for a minute. A 25-year old with no family purchases his first brand-new vehicle from a dealership. At this point in his life, he is single with an entry-level income and purchases a basic no-frills compact car. As this customer grows up, starts a family, and earns a higher income, he will need a larger car with more frills such as a built-in entertainment center for the kids. If your brand does not offer him a larger vehicle with more frills, it will lose out on the opportunity to make the sale to the competition. However, if your brand has a larger vehicle with more frills and makes it a point to offer it to him, your businesses’ the CLTV will increase.

Dynamic Concept, not Static Model that Adapts

Customer acquisition costs, projected customer spending, profit margins, and retention rates will vary over time as you adapt your business model to changes in the market and/or changes in your business objectives. Therefore, your customer lifetime value model can also change and adapt as your business goes through changes in objectives, costs, etc.

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October 12, 2018

How to Embrace Customer Lifetime Value (CLTV) as the Key Success Metric

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