Of course, we say every customer is priceless. And while that may be true in sentiment, there is a way to measure what a customer’s monetary value to a company is. Actually, there are several ways. The value of a customer over the lifespan of your business is called “Customer Lifetime Value (CLV). Understanding the CLV of a customer allows you to forecast sales, analyze trends, and other crucial operational elements to your business. This is crucial to any sized business.
Why is it crucial? It allows you to answer questions like the following:
- How much should you spend on marketing and sales for customer acquisition?
- How much should you spend on customer support/follow up to retain an existing customer?
- What is most valuable customer product/psychographic and how can localization and targeting help sell more of this?
- And more!
Most companies have a cost of customer acquisition. X amount of marketing brings Y amount of customers in. The modern customer has many more options with the ease of technology in finding a global supplier of most products and often numerous competitors in local services. You spend a lot of money/time/effort and other to resources to attract new customers so once they are “in” retaining new customers , and their social commerce influence circle( more on this later), is vital for the success of most organizations.
So, how do you calculate customer lifetime value? Customer Lifetime Value = Lifetime Value × Profit Margin
How much did it cost your business to create or source your product, advertise, market, support and manage operations? Take these business expenses into account when calculating customer lifetime value.
There are two specific other methods of determining Customer Lifetime Value. These are basing the analysis of of historical purchase behavior or predictive behavior. (There are other methods to include, but not limited to: Lifespan customer value, individualized CLV analysis and cohort analysis)
Historic Purchase Behavior
Historic modeling measures all the purchases made by a consumer. For companies that sell tons of products, this data can be pretty complex to track, measure and export, however there are tools that can help you do that. One of the benefits to method of analysis is that it is exact and gives precise data on behavior and helps you also establish baseline patterns. For example, did every 4 purchases a customer have also have 1 return? You must have good sales tracking and customer CRM (here is a link to an older blog about three good CRMs I have used and liked.
This is a lot of data, but relatively easy . Customer A purchased Widget 1 that cost x, widget 2 that cost Y widget 3 that cost z and simply add everything together. You can define the total number of transactions, total cost of sales and then adjust these by adjust gross profit to find out historic purchase value for any given customer.
Predictive Purchase Behavior
Predictive modeling allows you to project or infer how much revenue a customer will generate for your business over the course of the customer relationship. This is considered a more useful method and is often used to forecast cash flow, etc,. Companies that have contractual (SAAS companies, to pest control companies, etc) financials often us this model. Other people who have both continuous vs. discrete purchase opportunities. An example would be a companies that sells deodorant- continuous and a high-end bottle perfume as discrete
One of the cons to predictive lifetime analysis is in forecast accuracy and also that it is pretty formulaic and complex data collection.
Social Influence of Customer
One other thing that goes into the equation is the social influence- direct-my friend bought the thing from your company and loved it and she recommended it to me or indirect- one of the Kardashian’s mentioned your product. These people are often called “influencers”. What is the social influence of the customer who purchased.? That person’s social circle of commerce is also taken into account. Ie. Drew bought a product from you and might buy more in the future. However, Drew also referred Rob to your business. Without Drew, there would be no Rob purchases so that is taken into account. Part of this is actually formulaic (based on if the person is tracking conversions through analytics or estimated as well as social media monitoring and often a collection of referral data.
So, why are we even talking about customer lifetime value at all?
BirdSeed is a tool that was built to improve the customer experience. A better customer experience leads to more conversions. This means that without spending more you are increasing your total profits. Customers that have a better user experience are more likely to convert, become repeat customers, and influence their social circles to purchase from you as well. Birdseed allows the customer to engage with your website in the way they are most comfortable and at the time they are ready to engage.
What would more customers mean to your business? Discover how BirdSeed can help make your business more profitable immediately.
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Until Next Time,
Robert Urban – CMO of BirdSeed
Current CMO of BirdSeed and best-selling author, Marine veteran and PhD. Offers expert-level strategy and execution for SaaS and technology business through relationship driven marketing, content and sales while leading and managing people from all different backgrounds. BirdSeed is headquartered in Orlando, Florida.