Three words with a heavy meaning. Customer Lifetime Value.
But what does it really mean and more importantly how can I apply this to my business? Well, put simply, it means what it says. Seriously. Customer Lifetime Value = Customer Lifetime Value.
Now you didn’t start reading this just to be told that. So let’s expand a bit. The easiest way to do this is by breaking down each of the component parts. Or in this case, words.
So you represent a business. Your customer could be another business or possibly a consumer. There’s actually more kinds of customer but for simplicity let’s stick to these two.
So a customer is someone who, usually, pays you to purchase something. This something could be a product or service. As an example let’s say our customer is George Smith Ltd, a local plumbing merchant.
Yes customers have a life. You might think your customer will always be around, but they won’t. Quite often it depends on the life of your product or service. For example, if you sell a mobile contract it normally lasts 12-36 months.
Flipping this scenario around, if George Smith Ltd only uses your service once their lifetime will be 12-36 months. So, again, for simplicity, lets say George Smith Ltd purchases mobile contract deal with you for 24 months. They don’t renew after this (maybe we’ll discuss retention at a later date).
What value are you generating from the customer. Maybe the contract term for 24 months is a charge of £20 per month to the customer. So in this case, you’d be generating £480 over a 24 month period.
So George Smith Ltd is your customer for 24 months paying you £480 during this period.
And that’s one customer.
So now you’re looking at your customer database and seeing you’ve got 99 customers. But using the simple model again let’s say 33% have a 12 month deal, 33% (like George Smith Ltd) have a £24 month deal and the remainder a 36 month deal.
Now let’s say you make a flat 50% profit on each contract and that all your customers choose not to renew. Your customers would be segmented into the following groups.
|Term||Volume||Total demand||Total profit|
Although it was blatantly obvious from the start the third band of customers is your most valuable. Why, because they generate the most profit for your business.
Just like this you need to segment your customers in your most valuable and you can only do this by undertaking an exercise to figure your customer lifetime value. Naturally, we can help if you’re struggling. Just give us a shout.