Guest Post by Elizabeth Dillon of Digital Marketing NOW (Learn more about Elizabeth at the end of this post)
Do you know how much your customers are worth? If not, you could be throwing away significant money on ineffective marketing initiatives.
To maximize your marketing and, ultimately, your revenue, you must understand your customer’s lifetime value (CLV). The traditional calculation for CLV is simple: it’s the lifetime revenue you expect to generate from a customer minus the acquisition cost of that customer.
Many businesses conduct their marketing without calculating CLV. Without understanding CLV or analyzing the ROI of customer acquisition, you’re essentially operating in a marketing vacuum. This leaves your probability of success up to chance.
Looking only at the immediate return on campaign spends is shortsighted, may attract the wrong types of customers and could distract you from highly profitable customer segments that require a longer purchase cycle.
Often, marketers fail to properly account for a customer’s CLV. They may get stuck in their old ways of thinking, using marketing tactics they’ve been doing for years. Perhaps they have short term reporting requirements that ignore longer-term results. Increasingly, marketers flail around, chasing the latest trends, hoping to stumble upon the magical solution that will drive better marketing results. If holistic thinking isn’t part of a company’s culture, it can be easy to focus on the wrong things. Instead, it’s important to RETHINK your marketing, keeping CLV in mind.
The Power of CLV
Incorporating CLV into your marketing decisions can be a game-changer for your business. Think about the fierce loyalty – and value – of an Apple, Patagonia, Amazon, Zappos or Dunkin Donuts customer. It’s powerful and beneficial to attract customers with the highest lifetime value, going well beyond the direct dollar value of their transactions.
Most companies that include CLV in their ROI calculations include only the expected transaction value. However, to truly comprehend how CLV-based marketing decisions can transform your business, consider the following additional benefits from a CLV-focused approach:
- Increased Referrals
- Positive Social Media Sharing
- Free PR
Referrals are typically the easiest – and least expensive – way to acquire new customers. Therefore, customers that send referrals your way are invaluable, providing an easy, inexpensive way to increase your revenue. And newly referred customers can drive even more business your way through word-of-mouth referrals, exponentially magnifying the value of that original customer.
Remember, though, that not all referrals are created equal – some are just not the right fit for your business. Ideally, you want to attract customers that will send you highly profitable referrals, so count only customers with high quality referrals in your CLV calculations.
Typically, companies calculate the CLV of a customer merely by looking at their projected direct revenue. RETHINK your CLV by factoring in the number of quality referrals the customer is bringing your way – or is likely to bring your way in the future. You may have thought that a customer is bringing you $10,000 in sales, but their true value could actually be as high as $20,000, $30,000 or even $100,000, depending on their referral volume.
Do your customers with the highest CLV use social media? If they do, then actively leverage social media platforms to facilitate greater sharing among this valuable audience segment.
These days, we all hope that our customers will like, share and recommend our products, services and content. When looking at CLV, though, not all fans are created equal. Consider the types of friends your customers are sharing with. They might be sharing with a large audience, but if none of those people are in your target audience, it won’t help you. Quality trumps quantity here. If Customer A uses social media to connect you with 20 valid prospects, that’s more valuable than Customer B, who introduces you to 100 people that would never do business with you. Customer A may be worth $20,000 in CLV by connecting you with priority populations who buy from you. Customer B may be worth nothing – even though they got you in front of 5x more people.
Customer-generated PR is an incredible, effective and free way to raise awareness and excitement among prospects. Most companies don’t include the invaluable PR they’re receiving into their CLV calculations. If customers are connecting you with viable prospects – through their blogs, reviews and online comments – they should be viewed as loyal customers with high CLVs.
These customers typically become invaluable sources of referrals, both directly (through word-of-mouth recommendations) and indirectly (as people come to you after reading their positive online mentions.) According to BrightLocal’s Local Consumer Review Survey (2012), 72% of consumers trust online reviews just as much as personal recommendations. These online endorsements can add up to a lot of trust – and increased business – by new customers.
Often, companies only count the direct revenue from a customer. For example, a word-of-mouth referral may have resulted in $1,000 in increased sales. But these “indirect referrers,” who pump out free PR on blogs, review sites or other online venues, may persuade many others to purchase from you. In their lifetime, the customer’s “indirect referrals” may generate $5,000, $10,000, or even $100,000 in revenue for your company – far greater than the initial $1,000 revenue generated from the original direct referral. Integrate both direct and indirect referrals into your CLV.
By understanding the value of each customer, you’re now armed to create more efficient, effective marketing campaigns. CLV can shape how and where you spend your marketing budget.
Consider: Where are your best customers, those delivering quality referrals, social shares and free PR in addition to their purchases? How can you reach them, communicate with them and sustain their loyalty? Those answers will be pivotal to your marketing efforts. When you create incentives or loyalty programs, choose social channels or implement other marketing tactics, think of the channels that will effectively reach your most valuable customers. These high value customers generate more than just their initial sales – they create a lifetime of revenue for your company – so connecting with them should be your marketing team’s top priority.
By RETHINKING the true value of your customer – looking beyond the dollar amount of their direct transactions with you – you can better identify the customers that are truly fueling your growth. From this, you can create more efficient, effective marketing campaigns to grow your company exponentially.
About the Author
Elizabeth Dillon, Digital Marketing NOW’s Director of Client Strategy, has developed digital strategies and managed marketing campaigns for some of the largest companies in the world, including Staples, Merck, and Brooks Brothers. Prior to her work in digital media, Elizabeth worked on traditional media campaigns for Toyota, AT&T Wireless, and AstraZeneca. Digital Marketing NOW offers strategy, web development, design, SEO, paid search marketing, conversion optimization, display advertising, analytics and more.
David Anderson says
Very nice article Elizabeth, so many businesses are putting all their efforts into gaining more and more customers instead of focusing on their existing customers. If you are reading this, and this applies to your business, you could double your business in the next six months or so just by refocusing on your existing customer base. Have you heard of the Pareto Principle? Also known as “The Vital Few and Trivial Many Rule” the Pareto Principle was named after an Italian economist who observed in 1906 that 20% of the Italian population owned 80% of Italy’s wealth. He then noticed that 20% of the pea pods in his garden accounted for 80% of his pea crop each year. Coincidence? Well, it got him thinking …Vilfredo Pareto applied this “80/20” rule to pretty much everything – and whether or not you agree with it is your prerogative. But when it comes to your business, you’re missing out on a lot of profit if you don’t realize that 20% of your customers are more than likely responsible for 80% of your sales. If you’re doing business properly you should be able to track which customers are repeat customers. It’s a little-recognized fact that at least 20% of people who have purchased from you once… will buy from you again if you follow up with them. In other words one-fifth of your customer base is just waiting for you to offer them something new…my own testing and studies with my students show that you can often boost your revenue by an extra 30% to 50% – just by following up with your customers. Why should you follow up? If you don’t follow up with your customers, you are losing a lot of profit – it’s as simple as that.Too many businesses focus on generating income from the sale of a single product or service. If you take this approach the number of new clients you take on will always limit your income. And the bottom line is that it costs more to acquire new customers than it does to follow up with your existing ones. Not only that but when a person trusts you and likes your product or service enough to buy from you once, they’ll often buy from you again and again. In fact, “backend” sales from your follow-up offers can immediately increase your revenue by 30% to 50%! Your existing customer base is four or five times more likely to buy from you than a “cold” market, and the “lifetime value” of these customers is one of the greatest assets of your business. Repeat sales can be so profitable because once people have bought for the first time, at least 20% of them will buy again. And this is where you should focus a good deal of your attention to ensure you maximize the lifetime value of your customers.