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.
Loyalty saves! Acquiring new customers cost five times more than retaining existing ones.
Although it seems like a very useful metric to consider when making strategic decisions, it is important to remember that 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.
4. Customer Lifetime Values are not static… they change over time.
This is a very common business mistake. Business owners and managers make future estimates based on the current LTV calculation, but those are accurate only for the near future and not five or ten years from now. It is wrong to assume that by keeping acquisition costs lower than the current Customer Lifetime Value, you will have a certain amount of revenue many years from now.
Consistent monitoring and critical insight work hand-in-hand with CLV.
Chances are that if you measure CLV one year from now, you will see a different number, even within the same channels. Your team should monitor, compare and identify trends in LTV overtime, between the same and different channels and customer groups.
Overall, CLV can be a fantastic analytical tool but only when it is measured frequently, all customer types are taken into consideration, extra attention is paid when future risks are higher, and when it is used as one of several strategic tools and not as a strategy itself.
Looking to learn more about Client Retention? Have a look at these articles to further expand your knowledge and expertise!
