Customer Lifetime Value

27 July 2023 Martin Cheetham

So many businesses are geared up for marketing and sales, as if their only job is to hook and land the next customer.

So the experience initially is fantastic. As all the promises and commitments are made. People and systems are proficient. Answering queries immediately and putting our minds at ease. All the while affirming that “You’ve made the right decision choosing us!”

Then you sign the dotted line…

…and the cracks begin to show. They may seem innocuous at first, but slowly (and surely) it all begins to fall apart.

What these types of businesses fail to understand is that a sustainable business is built on repeat business. Customers coming back for more. And bringing their friends.

A customer’s lifetime value (CLV) is so much more valuable than a once-off purchase, as highlighted by these three points:

  1. Customer Lifetime Value Growth:
    • Studies have shown that increasing customer retention rates by as little as 5% can lead to an increase in profits ranging from 25% to 95% (Source: Harvard Business Review).
  2. CLV and Customer Loyalty:
    • Loyal customers tend to have a higher CLV than one-time purchasers. Acquiring a new customer can be 5 to 25 times more expensive than retaining an existing one (Source: Harvard Business Review).
  3. Customer Segmentation and CLV:
    • Customer segmentation based on CLV can be a powerful tool for businesses. The top 1% of customers with the highest CLV can sometimes generate up to 20% of a company’s total revenue (Source: Forbes).

The CLV formula can vary depending on the business model, but a general formula can be expressed as:

CLV = (Average Purchase Value) x (Number of Purchases per Year) x (Average Customer Lifespan)

So improving CLV involves strategies to increase customer retention, encourage repeat purchases, and provide excellent customer experiences to maximise the value customers bring to the business.

“The key is to set realistic customer expectations, and then not to just meet them, but to exceed them – preferably in unexpected and helpful ways.” – Richard Branson

And I think to add to this quote from Mr Branson, is that you need to be able to do this in a sustainable way. You need to exceed these expectations not just once or twice, but in perpetuity. Then those customers become something else… they become raving fans.

The very same thing applies to employees joining the business. Attracting, recruiting, and onboarding new talent. But that’s a story for another time…