Updated: Aug 3, 2021
It’s common for small businesses to set a goal of acquiring more customers. But have you ever thought about the long-term value that each customer brings to your business?
Understanding this is understanding the Lifetime Value of a Customer, also known as LTV. This so-called “value” of a customer can help you make many decisions for a business, including marketing. In mathematical terms, LTV is an estimate of the average revenue that a customer will generate for your business throughout their lifespan as a customer.
When you calculate the LTV of a customer for your small business, it can help you develop strategies such as:
Gaining new customers
Customer Lifetime Value helps you allocate your customer acquisition budget based on what the new customer will actually bring to your business. Your customer acquisition budget is basically what you are willing to spend in terms of marketing in order to gain a new customer.
Doing this also helps you develop a better understanding of how much you can spend to acquire customers. Newer businesses or those with less “established” products or services especially need to focus on customer acquisition in order to create a large customer base.
LTV helps you decide how much to spend on retaining customers. Take the Lego Company as an example. They are investing over $150 million to make their products more environmentally-friendly. Because society has become more environmentally aware, this is a great way for Lego to portray that they support their customers outside of just their business.
Your retention budget obviously doesn’t have to be that large, but getting involved with your customers' communities and personal interests is a great way to show your commitment to their needs. This helps you manage your customer relationships towards not only breaking even but becoming profitable! You can measure customer loyalty with factors such as purchase frequency and probability.
Using your customers data builds more accurate and detailed customer profiles. These profiles are groups of customers that have similar characteristics such as their buying habits. Personally, I refer to these as “personas.” I even keep a workbook to help others build & determine their customer personas. This allows you to understand your customers really well. A persona profile will get into the responsibilities, fears, and aspirations of your target audience,
By knowing your target marketing and segmenting customers into different groups, you can use your advertising and marketing funds wisely. For example, you may use a smaller budget for the group of customers that purchase the smaller packages you offer. While you would invest more for the group of customers that are more likely to purchase the larger packages of your business.
Focusing on the customer segments that give the highest profit and value to your company is a great way to increase customer LTV & the overall success of your business. A strong customer relationship can continue out for months, years, or even decades under the right circumstances...so know your target market!
Return on Investment
LTV provides a great indicator and measurement of marketing campaign performance. Your marketing campaign could consist of so many different tactics, such as social media, television, billboards, and emails. But did it work? Did you create the most effective marketing campaign as possible?
Most businesses only look at the immediate revenue earned in a marketing campaign. But if you factor in LTV (the expected amount of revenue from those new customers over their lifetime), you'll get a more accurate representation of ROI of your campaigns.
Knowing the LTV of your customers can shine some light on the effects of certain high-level decisions on the value of customer assets. The LTV data can be used to encourage a business’s goal to be to have long-term customer satisfaction, rather than only focusing on short term sales. Although focusing on sales in the present is good for your business, having a plan for long-term success is a great way to ensure stability within your business.
Overall, the most time, energy and money you’ll spend is getting a customer to walk through your door for the first time. So it is important to know the value they bring. That way, you can focus on gaining and retaining those same awesome customers for your business!