Written by: David Goddard
You know the old line: It’s better to keep an existing customer than try to find a new one. But really, how true is that? Boosting Customer Lifetime Value (CLV), and by extension overall profits, will depend not just on your organization’s ability to reduce its churn rate but the skill with which you can consistently meet a larger share of your customers’ needs.
One of the key ways enterprises measure whether they’re getting the most out of their customer relationships is by calculating Customer Lifetime Value (CLV) 一 or the total revenue a single account generates. Whether your business is working in a B2B or B2C sector, a high CLV is an important indicator of long-term financial health and future revenue.
But what action do you need to take if the numbers don’t look promising?
Why customer retention beats customer acquisition
The importance of customer retention has been built into corporate best practices for centuries. While the 19th-century philosopher Vilfredo Federico Damaso Pareto coined the so-called “80/20” rule after observing the yields of his pea pod plants, the idea applies to business as well — a vast majority of your profits (the 80) will most likely come from just a segment of your customers (the 20).
While the exact numbers may vary depending on your industry and stage of development, the general message is clear: Keeping your best customers loyal will result in high overall returns.
What Customer Lifetime Value can tell you
Customer Lifetime Value is an essential metric. It can be used to understand if a buyer is a loyal customer likely to make a repeat purchase — the backbone of strong customer retention. Unlike other metrics, however, CLV also lets you know if the customers you are retaining are adding revenue to the level you’d like.
Although reduced churn makes the CLV seem higher, it’s indicating that the typical customer is at a low-average order value or if their purchase frequency is down.
Finally, Customer Lifetime Value can serve as important information for your marketing department. It helps them to understand which potentially high-yield customers aren’t making the kinds of repeat purchases expected of them. These numbers allow your team to set clear priorities.
Having a single valuable metric across multiple departments makes it easier for leadership to make strategic decisions across silos and move cohesively.
Determining if your Customer Lifetime Value is where it needs to be
While understanding the importance of high Customer Lifetime Value is one thing, knowing if yours is at a healthy level is entirely different. Although multiple formulas exist for a Customer Lifetime Value calculation, the basics remain consistent:
(Customer value) x (average customer lifespan) = CLV
Improving the customer experience
If you believe your CLV needs a boost, examining your customer experience is a good place to start. Overall, today’s customers, whether you’re a B2B operation or selling directly to the consumer, expect a certain level of personalization in their experience.
Some top factors to examine include:
- Sales: So much of having a great customer experience starts with the sales team. These professionals are responsible for turning interested prospects into first-time customers and first-time customers into loyal repeat buyers. However, this job gets a lot harder if the service qualities your enterprise is providing 一 like timely delivery and quality products that meet expectations 一 aren’t there.
- Customer Service: Treat your customers well, and they’ll reward you with repeat business. Great customer service, however, isn’t just about saying the right thing to a customer but also having the processes in place to turn their feedback into actual results 一 at times, harder said than done. Getting it right means doing your best to avoid departmental silos and ensure smooth communication between the customer service team and decision-makers throughout the sales department and the supply chain.
- Marketing: While you may think of marketing as having more to do with bringing new customers into the sales funnel, the department also plays an essential role in ensuring existing customers make repeat purchases on a regular basis and develop loyalty to your products and services. To do this effectively, marketing leaders need to coordinate with product development, sales, and customer service teams to ensure that both the products you’re marketing and your overall messaging accurately reflect customer wants and needs.
- Supply Chain Optimization: As the backbone of so many others of your business processes, this is a big one. While your customers may not get to interact directly with the vendors and subcontractors that make up your supply chain, they certainly feel the impact of any bottlenecks or delays. Using an Integrated Business Planning (IBP) initiative to connect supply chain planning to some of your customer-facing operations can be a big step towards improved retention.
At each stage, an integrated approach to business processes and decision-making is reflected in the customer experience.
Integrated Business Planning (IBP) provides solutions throughout your enterprise. Its effect ultimately improves the customer experience.
For decades, the Principals of Oliver Wight have helped enterprises reach their fullest potential. To learn more about how Oliver Wight can help your organization get the most from each and every customer relationship, be sure to visit our website and review our resource offerings.