Every day more and more managers and decision makers are discovering the strategic importance of CLV in forecasting, planning, and decision making. Although Customer Lifetime Value has been around for a while, some small companies still do not clearly understand how vital it is for their business.
As we have outlined within other content within our site, having a Lifecycle Analytics or CLV strategy for your overall SEO plan is a game changer. While working with our Fresno SEO clients, we have implemented a very strategic scoring process for each of our clients to clearly identify who their best “type” of client is as well as how to better target this group of prospects.
However, even those who understand its strategic importance consistently ignore 4 very important facts:
1. Customer LTV is not a strategy, but an analytical tool.
If your business has substantial customer revenue and costs even after the first transaction, Customer Lifetime Value can be an excellent analytical tool to evaluate future investments. You can calculate LTV (Life Time Value) and use it together with other parameters to support your strategy. And it is indeed a very useful metric to consider when making strategic decisions, but it is not a strategy itself. The future of your business is uncertain and calculating LVT can give you some clarity, but it still is a set of predictions and shouldn’t be confused with actual facts.
2. Customer Lifetime Value is not just one number – it should be different numbers for different types of customers.
If you are using just a single number for all your customers, stop now. You’ve got it all wrong. It’s fine to calculate that “the average” customer is worth $387, but do not think that this is enough to make wise business decisions. Chances are, your business has a variety of different types of customers and one single estimation doesn’t reflect all of them. Remember that different acquisition channels can generate more LTV than others, with organic search to generate more LVT than average in comparison with other channels in retail and ecommerce businesses.
3. You should be very careful with your CLV methods when a very large percentage of it is at risk in the future. Or consider spending more on the customer.
Let me explain. We often see businesses spending 95%-100% of the first transaction profit on acquiring a new customer in hopes that these new customers will bring increased profits in the future. This way, you spend more on third-party services (such as marketing) before even acquiring the customer. It is wiser to spend some of your money on retaining current customers than risking acquiring new ones. If you still insist on spending a large amount of first transaction profit on customer acquisition, make sure you closely monitor and analyze the results as the risk of failing (and losing money) is way higher.