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Customer Lifetime Value
Business owners have begun taking a "long term"
approach to marketing. They have been assessing
the "lifetime value" of the customer. Businesses
who are able to capture customer loyalty can often
capitalize on this.
Example: Stop and Shop, a grocery store chain
in New England, offers a home delivery service
called "PeaPod", which allows customers to shop
for their groceries online, and have the selected
groceries delivered to their home at a time of
the customer's choosing. To attract customers
to this service, Stop and Shop might be willing
to offer significant discounts or referral compensation.
That's because once a customer is signed up and
using the Peapod service, and their experience
has been positive, they are very likely going
to be a repeat customer. The value of the customer
is more than just a single food order.
How much are your customers worth? It depends!
Are you selling a consumable? Are you selling
a recurring service? What opportunities exist
for upselling? If you do not have related items
to sell, or a recurring service to offer, the
lifetime value of a customer is diminished.
Examples of products and services that have a
high lifetime value are:
credit cards
mobile phone
services software as a service (subscription software)
As an example, it might make sense to spend $50.00
to acquire a customer, even if their first purchase
is much less than that. How is this possible?
For this example, let's say that you sell a subscription
service, customers typically remain a customer
for 3 years, and they pay $20.00 per month for
your service...
$20.00 X 12 months = $240.00 per year;
$240.00 x 3 years = $720.00 potential revenue
If you spent $50.00 to acquire that customer,
and your costs associated with the customer over
the course of those 3 years are approximately
$100.00, you are investing $50.00...
$720.00 - $100.00 (expenses) = $620.00;
$620.00 - $50.00 (cost to acquire customer)
= $580.00 profit.
A fairly healthy return on your initial $50.00
investment!
In order to assess the lifetime value of a customer,
you need to know the average life expectancy of
the customer. Not in terms of how long you expect
the customer will live, but in terms of how long
the average customer needs or uses the products
and/or services you represent.
Do you have a related product, service, or subscription
that you can sell to existing customers? Evaluating
the lifetime value of a customer is not only beneficial
to subscription services, but also for companies
that have multiple products or have a related
product line.
Remember, existing customers are highly targeted.
They have money, they have already proven that
they will spend money, and they have an interest
in your offerings. Existing customers also have
a level of compatibility with your offerings.
With existing customers, you need not be concerned
with system requirements, as they clearly have
the capacity to run your existing software. There
are a number of ways to amortize your existing
customer base, including upselling, add-ons, upgrades,
and related materials. Adding any of these to
your product mix will increase the lifetime value
of your customers.
You must also consider organizational infrastructure.
Are infrastructure upgrades required to support
a growing customer base? In other words, will
it cost you more money in operational expenses
to retain your existing customers for a longer
period of time? In most cases, the infrastructure
changes required are trivial when compared to
the potential revenue from maximizing a customers
lifetime value, but it is still something that
should be evaluated.
Take a close look at the lifetime value of the
customer, and determine what you can afford to
spend to acquire new customers.
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Developer
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Customer Lifetime Value