Few businesses really understand how crucial Customer Lifetime Value is whenever they acquire – or lose – a customer.
Expensive (and wasteful) advertising. Tradeshows. Social media marketing. Search Engine Optimization. Landing Pages. A/B Testing. The list goes on.
The lengths – and costs – that companies go to in order to attract new customers is part and parcel of business. But what about existing customers? How much do companies value customers that have already purchased from them? If more companies realized exactly how much existing customers contributed to the business, maybe they’d treat them better.
There are two numbers that every business needs to acquaint themselves with:
- The average cost in acquiring a new customer;
- How much, on average, that customer is worth to the company over the course of the relationship.
The Importance Of Customer Lifetime ValueManufacturers of razors, inkjet printers and video games consoles – amongst others – understand the importance of calculating Customer Lifetime Value. How much business, on average, that customer is likely to spend over the course of the time that they’re using your product or service.
Whether it’s a five-blade with dual lubrication strips, extended-gamut inkjet cartridges or New Super Mario Bros. 12, they know that selling the razor/printer/console cheaply (or even at a loss) is offset by the “consumables” that users subsequently buy. That’s why Gillette are happy to sell a Fusion ProGlide razor for around ten bucks, since a pack of eight replacement ProGlide blades will cost you around $30.
Customer Delight Means Customer RetentionThe best companies aim at delighting their customers before, during and after the buying process. As a result, unless they screw-up royally, the majority of their customers stay loyal.
Add the internet to the mix and customer acquisition – as well as customer retention – becomes a lot broader as well as a deeper for a business that’s willing to do the work.
What do I mean?
Well, companies such NetFlix or Hulu are much more likely to have a higher Customer Lifetime Value than the video rental store on the High Street (assuming that it’s still in business). In the old, publisher-controlled model, creatives such as authors or musicians made pennies on the sale of each book or CD. Today, they can self-publish directly to their most loyal fans, and make tens of dollars (or more) on each sale.
Customer Disaster Means Continual Funnel-FillingOf course, there’s also the other side to the coin. The companies that don’t get it.
The companies that spend time, resources, and efforts on making as big as noise as they can to get strangers to notice them. Then, once they’ve been granted a piece of attention, they waste the opportunity by putting everything they’ve got into a single customer transaction. They’re myopic, only doing what it takes to get the sale today, rather than 100 sales over the course of a month, a year, or even a decade. As a result, they’re compelled to spend their time continually looking to fill the sales funnel with new prospects.
Their model is numbers-based: hit enough of an audience, and a few will engage. It’s the sales process of yesterday’s door-to-door salesperson, applied today. However such a relationship has no lasting or recurring value, since the customers’ ‘permission token’ has either been expelled – or revoked.