3 Reasons why you should measure lifetime value
Part one?in our business success series introduced you to the importance of measures. But, finding the right measure can be difficult. ?Over the next few articiles we help you find the right measures.
The first measure is Customer Lifetime Value ?(CLV). ?This is a powerful measure that until now has been difficult to calculate. ?CLV tells you on average how profitable your customers are over the time they will be customers. ?For example, if you generate $10 in profit (sales - cost to get the customer - product cost)?from each customer each month for 5 years, you CLV will be $600.
You may think a large database of users, like a SaaS company has, ?to calculate CLV in needed.?? CLV has been in use well before business went online,?all businesses calulate lifetime value. ?You need to be smart.??Airlines, coffee shops,?and supermarkets have loyalty programs. ?These programs gather data about customers and help calculate CLV.So why is CLV an important measure, and what can it do for your business. Here are 3 reasons why you should consider LV in your business.
1. Reduce risk of overspending on marketing
Acquiring customers is the most important function of a business. ?You can have award winning,products but with no customers you have no business. ?The tendency here would be to invest in ways to get customers, but the risk is spend to high and you lose. How do you make sure you are not spending to much.Included in the Lifetime Value calculation, is a Customer Acqusition Cost (CAC). ?This is a cost every business should be aware of. ?Its how much money is being spent to get customers. If your CAC is more than your Customer Lifetime Value, trouble is brewing. ?When you spend more on acquiring a customer than you get back in revenue, you are making a loss - in short time your business will begin to struggle.A successful acquisition strategy is one where you recover the cost quickly with a multiple that is high enough to cover your overheads and product costs. ?Measuring your full CAC gives you an opportunity to understand this and stop overspends before its too late.
2. Make more revenue from existing customers
Knowing your Customer Lifetime Value, means you understand 2 important variables, revenue and life. ?Each customer will generate revenue over a certain period. ?Extend this period and you have generated more revenue. ?Understanding lifetime value focuses your business on innovative approaches to improve your revenue.For example, you may develope promotions targeted to customers about to reach lifetime. Whereas in the past, new customers were the target.
3. Detect problems early
Customer Lifetime Value is a measure you look at regulary and watch for trends. ?Notice a negative trend, you can immediately put in place actions to fix it. ?Before it is too late. ?Often businesses notice revenue decreasing but have little understanding of why.With CLV you can identify the source of the problem, is it a lower spend per customer or are they leaving earlier. ?If its a lower spend, your product may not have the appeal it once did. ?If its customers leaving earlier, you can fix that too.
Think of your business as a set of scales, get and maintain the balance, and you have a successful business. Changing your strategies early prevents waste and retains focus.