How much are your customers worth to your business? What is each customer’s lifetime value? Business and marketing plans encourage us to work out our customers’ lifetime value, but in our experience, companies rarely measure this key metric.
Let’s begin with what it is.
A customer’s lifetime value is the sum total of what a customer could spend with you over the course of a relationship.
This varies from industry to industry (for example, insurance companies say most people will switch within six years, so your lifetime value with each customer is maximum six years), but on the whole it’s an important figure for two reasons:
3 Ways to determine customer lifetime value
SiriusDecisions highlights three key scenarios that should be taken into consideration when determining customer lifetime value:
1. Current value and cost to win.In a nutshell, you need to know what each of your customers is currently worth to your business, and what it has cost your company to get them there. Interestingly, you might actually find that its costing your more to service a customer than they are paying you, and these are accounts that should be terminated or renegotiated.
On the other hand, accounts that are satisfied and worth more than what it costs to service them should be well looked after. They are also excellent candidates for upselling, cross-selling, and any Account Based Marketing (ABM) efforts you might be considering.
2.Full-future potential. This metric looks at what a company of this size and type could potentially buy from you over the course of being a customer: What are their needs, what do you offer, and where is there alignment? You will mostly find that you are only servicing a small portion of the full potential of their needs.
Take into consideration all possible buying centres, various stakeholders across the organisation and potential wallet share. Once again, this is a good place to begin when considering who is a good candidate for an ABM strategy.
3.Likely outcomes and timelines. This is your reality check. How much potential business could you typically realise from companies of this size and type (this isn’t about your specific client, but what other companies in their industries spend and what they spend it on). You then need to use data – past results and predictive analytics – to work out the time horizon for this spend.
Knowing these timelines, as well as the cost to keep and grow that customer relationship over time gives you the ability to create much smarter account plans, which in turn makes it both simpler and more cost effective to integrate sales and marketing. Your goal is to maximise retention and growth, while neither over-investing nor under-investing time and resources in servicing those accounts.
Determining which customers add value to your business
Ultimately, strategic customer lifetime value reveals two key things:
ABM also ties into your lifetime customer value in two ways.
First, with sales and marketing working together, as ABM encourages (and even requires), you can really dig into your metrics and determine what a customer account is worth and balance invest versus that worth over time.
Second, you’ll discover the best high-value clients to focus on for future growth and sales.
ABM is all about determining which clients you should be approaching, what they care about and the language they respond to. Starting with your lifetime customer value is the perfect way to determine who those accounts are.