How Much Are Your Clients Worth to You?

Do you know the lifetime value of your customers? If not, you could be wasting money and resources or expending your efforts in the wrong direction. While it is important to remember that each customer is a real person, it is also important to understand the money math behind your efforts and your results. Comparing your customer lifetime value to your cost of customer acquisition will show the true cost of your sales and marketing efforts.

Highly valuable customers help drive your revenue, enabling your business to grow. In order to identify these customers, you have to understand customer lifetime value. Keep reading to learn more about how much your clients are worth to you.

What is customer lifetime value?

The lifetime value of a customer considers the revenue that can be expected from a customer and the average lifespan for a customer. By factoring in the amount of revenue that can reasonably be expected and the average lifespan of your customers, you can determine which customers offer the most value for your business.

This metrics helps you determine the revenue a single customer can generate for your business over the entire course of your working relationship. If a customer purchases from your business for a longer period of time, their lifetime value increases. If a customer purchases more expensive products or services from your business, their lifetime value can also increase.

In simple terms, your customer lifetime value equals the average purchase value times the average purchase frequency rate. Calculating the customer lifetime value for your business may require you to do some extra legwork and understand the metrics of your business.

How to Improve Customer Lifetime Value

If valuable customers help drive your revenue, how do you gain more valuable customers? Once you know the customer lifetime value for your business, you can work to improve it. Increasing customer satisfaction and improving your customer retention are two ways to increase the lifetime value of your customers.

By increasing customer satisfaction, you can create opportunities to cross-sell or upsell. If customers have positive experiences with your business, they may be more likely to purchase additional products or services from you. You also have an opportunity to offer “buy forever” programs that generate consistent revenue. Monthly subscriptions, membership programs, and similar models increase the lifetime value of a customer significantly. You can increase both the revenue generated from a single customer and the customer lifespan with this tactic.

Satisfied customers are also more likely to spread the word about your business. Positive word of mouth marketing costs you nothing, but it can help you acquire new customers and grow your business. Consider implementing a loyalty or referral program as a way to acquire new customers while spending less time and money. You can increase your customer lifetime value by reducing the cost of acquiring a new customer.

Improving your customer retention can also help improve your customer lifetime value. Acquiring a new customer costs significantly more than retaining an existing customer. If you lose a customer, it will cost you quite a bit to make up the lost revenue by securing a new client.

When you spend more to acquire a new customer, your customer lifetime value decreases. More time and resources are needed to land a client. However, if you can retain a customer, you increase your customer lifespan. When a customer generates revenue for a longer period of time, your customer lifetime value increases.