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I Advice - Customer Lifetime Value - CLV - What Does it Really Mean?
From the point of view of an outside observer it would appear that every project is doomed to be late, over budget or both. For large public construction projects in the UK such as the Millennium Dome, Wembley Stadium and more recently the London Underground refit, this would truly appear to be the case.Even on a smaller scale many product development projects tend be misguided in what they will achieve within the planned time frame. There are normally a number of stock excuses for such a failing. These can range from “There was an unexpected change made by the customer”, “We underestimated the amount of time required” or even “We didn’t understand the risks in
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1%
of my audience will respond by calling (called a “response rate”) and that 80% of the responders
will become new customers.
* Given this forecast and my goal of 800 new cu
In real estate, the expression is "location, location, location." In business, the expression is "image, image, image." However business owners, entrepreneurs and home-based offices are missing the "image" of a more expansive company size by using their own voices on general company messages and voicemail greetings. If you are attempting to get projects and assignments with larger organizations and corporations, the sound of your own or one of your employee's voices on the company greeting or general voicemail makes you appear as if you are a small business, a solo entrepreneur or home-based business.With the ability of remote access to most voicemail system
The hardest part of calculating CLV is figuring out exactly what your customers’ “lifetime” really is…. and the only accurate way to arrive at that number is by getting, storing and analyzing your customers’ data. Period. If you’ve been in business for a while, this should be easy to get, but if you’re a start-up you’re going to have to estimate this based on industry standards.
Although there are several ways to arrive at CLV, the easiest is to calculate:
1. The average length of time a customer stays your customer
2. The number of transactions that an average customer will have with you during that time and
3. The average dollar amount per transaction
Multiply these together and you’ll arrive at a usable number. But remember, junk in, junk out… so make sure your original numbers are accurate!
Once established, you can use your CLV as a benchmark for developing a realistic customer acquisition (or retention for that matter) budget. For example, let’s say you find out that your average customer:
1. Stays with you for 5 months
2. Purchases something from you 3 times per month
3. Spends an average of $2 per transaction
In this case your average CLV would be $30. Based on this, it would be foolish to spend even $20 to gain one customer… you’d be left with little, or no, profit (unless of course, your margins are outrageously high). On the other hand, your customers may hang in there for 22 months, spend $20 per transaction and purchase from you a greater number of times. Since your CLV would be much higher, you could afford to pay more to gain a customer. Again, the specifics differ widely and there are many factors to consider, Also note that this does not include any costs associated with preserving this customer relationship. In the real world these must be included.
It is crucial that you understand your CLV and use it to guide your communication decisions! (A good book on this subject is Donald Lehmann and Sunil Gupta’s, “Managing Customers as Investments”… visit our website, www.StrategicMarketingAdvisors.com for a review and ordering information.)
3. Your specific goals, such as:
* Acquiring “x” numbers of new customers
* Increasing the number of current customer transactions
* Increasing the length of time your customers remain your customers
4. Proposed media costs and actual/forecast response and sale rates (you can find these out online or from any reputable advertiser)
Once armed with this information, you’ll be in a good position to choose. Here’s an example of how this might work. Let’s assume the following:
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1%
of my audience will respond by calling (called a “response rate”) and that 80% of the responders
will become new customers.
* Given this forecast and my goal of 800 new cu
As a franchisor, I see the need to franchise Space Colonies and yet I also understand that this is not something you can come out and talk about. Most folks who are on the leading edge of the Privatization of Space agree too and it makes sense. The Franchise Business Model makes sense for space colonies.Well also regarding this issue to franchise Space Colonies in the future you cannot talk about that stuff, (well at Futurists Club Meetings in Merry Land maybe?) but people will think you are crazy, so you could write about it in Science Fiction Novels I suppose?Why does the Franchising of Space Colonies make so much sense? Well look at the founding of ou
1. The average length of time a customer stays your customer
2. The number of transactions that an average customer will have with you during that time and
3. The average dollar amount per transaction
Multiply these together and you’ll arrive at a usable number. But remember, junk in, junk out… so make sure your original numbers are accurate!
Once established, you can use your CLV as a benchmark for developing a realistic customer acquisition (or retention for that matter) budget. For example, let’s say you find out that your average customer:
1. Stays with you for 5 months
2. Purchases something from you 3 times per month
3. Spends an average of $2 per transaction
In this case your average CLV would be $30. Based on this, it would be foolish to spend even $20 to gain one customer… you’d be left with little, or no, profit (unless of course, your margins are outrageously high). On the other hand, your customers may hang in there for 22 months, spend $20 per transaction and purchase from you a greater number of times. Since your CLV would be much higher, you could afford to pay more to gain a customer. Again, the specifics differ widely and there are many factors to consider, Also note that this does not include any costs associated with preserving this customer relationship. In the real world these must be included.
It is crucial that you understand your CLV and use it to guide your communication decisions! (A good book on this subject is Donald Lehmann and Sunil Gupta’s, “Managing Customers as Investments”… visit our website, www.StrategicMarketingAdvisors.com for a review and ordering information.)
3. Your specific goals, such as:
* Acquiring “x” numbers of new customers
* Increasing the number of current customer transactions
* Increasing the length of time your customers remain your customers
4. Proposed media costs and actual/forecast response and sale rates (you can find these out online or from any reputable advertiser)
Once armed with this information, you’ll be in a good position to choose. Here’s an example of how this might work. Let’s assume the following:
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1%
of my audience will respond by calling (called a “response rate”) and that 80% of the responders
will become new customers.
* Given this forecast and my goal of 800 new cu
In the US, it is anticipated that 76 million baby boomers will retire in the next ten years. However, there will be fewer than 50 million workers to replace them. Many organisations will be forced to retain an older workforce. Those organisations which develop deliberate strategies to retain older workers will do more than go with the inevitable flow of labour supply and demand. They will improve productivity.Older workers were brought up in an era of company loyalty. Their need to move on every two years was never as strong as today's younger workers. If they have been successful in their careers, they also have probably had enough of "moving on".By sta
In this case your average CLV would be $30. Based on this, it would be foolish to spend even $20 to gain one customer… you’d be left with little, or no, profit (unless of course, your margins are outrageously high). On the other hand, your customers may hang in there for 22 months, spend $20 per transaction and purchase from you a greater number of times. Since your CLV would be much higher, you could afford to pay more to gain a customer. Again, the specifics differ widely and there are many factors to consider, Also note that this does not include any costs associated with preserving this customer relationship. In the real world these must be included.
It is crucial that you understand your CLV and use it to guide your communication decisions! (A good book on this subject is Donald Lehmann and Sunil Gupta’s, “Managing Customers as Investments”… visit our website, www.StrategicMarketingAdvisors.com for a review and ordering information.)
3. Your specific goals, such as:
* Acquiring “x” numbers of new customers
* Increasing the number of current customer transactions
* Increasing the length of time your customers remain your customers
4. Proposed media costs and actual/forecast response and sale rates (you can find these out online or from any reputable advertiser)
Once armed with this information, you’ll be in a good position to choose. Here’s an example of how this might work. Let’s assume the following:
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1%
of my audience will respond by calling (called a “response rate”) and that 80% of the responders
will become new customers.
* Given this forecast and my goal of 800 new cu
In an article also appearing on this website, I spoke about how to handle the upset, or angry customer. Here's a review for helping upset customers.:L - Listen and don’t interrupt E – Empathize with something like, “I can understand why you’re upset. I would be upset too.” A – Ask – What can I do to make you happy? R – Resolve – Unless it’s ridiculous – do itThe question came back to me, “How should this empowered manager handle the ridiculous request?” Here’s my reply.As the owner or general manager of the business you’ll need to decide just how much empowerment you'll give each person in your management structure.Let's
3. Your specific goals, such as:
* Acquiring “x” numbers of new customers
* Increasing the number of current customer transactions
* Increasing the length of time your customers remain your customers
4. Proposed media costs and actual/forecast response and sale rates (you can find these out online or from any reputable advertiser)
Once armed with this information, you’ll be in a good position to choose. Here’s an example of how this might work. Let’s assume the following:
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1%
of my audience will respond by calling (called a “response rate”) and that 80% of the responders
will become new customers.
* Given this forecast and my goal of 800 new cu
"A person who never made a mistake nevertried anything new." -Albert EinsteinOne of the crucial factors in keeping any business growing is the ability to consistently attract new business. Of course, that's often easier said then done. Most average businesses struggle to generate a good stream of relatively steady leads. But some businesses manage to generate a steady stream of fresh, high-quality leads. Could there be a system to their success? More important, would your business improve if you adopted that system?The only thing that matters to a business owner is Return On Investment. Thousands of searches are done daily by people
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1%
of my audience will respond by calling (called a “response rate”) and that 80% of the responders
will become new customers.
* Given this forecast and my goal of 800 new customers, I know that I’m going to have to mail out
100,000 sales letters.
* As luck would have it, the cost to create, print and mail one letter is 37 cents (using 3rd class
postal rates) which comes to $37,000… leaving me with a $3,000 “fudge factor”
So, let’s see where I stand…
1. The campaign cost is well within my budgeted amount of $40,000, my forecasts are reasonable based on industry standards and experience, and can realistically accomplish my goals. So everything is perfect, right? Wrong.
2. 800 customers with a CLV of $40 will result in revenues (over time no less) of only $32,000! That’s called a losing proposition!
What should I do?
1. In the short term, find out if there are less expensive advertising vehicles that may bring you similar results.
2. Find ways to reduce the direct mail costs without sacrificing response and sale rates (e.g. one color vs. four; lighter paper stock).
3. Identify ways of increasing the sales rates (for example beef up the offer; send to more people – you’ll get economies of scale this way so the per piece price will drop dramatically and you’ll acquire more customers)
4. Offer added products to increase your customer’s average transaction amount
5. Institute robust retention programs aimed at increasing the longevity of your average customer
Although this is a very simple example of how CLV works, it clearly demonstrates how important understanding it is to your business. Without considering CLV, you'll be shooting in the dark - potentially wasting thousands of dollars and commiting serious, or even devastating, blunders.
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