The Lifetime Value of a Customer
We often see and hear about customer service measures such as Net Promoter Score (NPS) and Customer Effort. But the key measure of the Lifetime Value of a Customer rarely gets a mention. Let’s put this right.
What is meant by the term Lifetime Value of a Customer?
Imagine you run a café. I come to visit you twice a week and purchase a coffee on each occasion. You charge £3.00 for a coffee and your mark-up is, for the sake of example sake, 80%. This means you are earning £2.40 for each purchase I make i.e., £4.80 per week.
Now, because you serve great coffee, I visit your coffee shop on average twice a week for 46 weeks of the year. This means I am spending £276 a year on your coffee of which you are keeping £220.80.
Now let’s imagine that I stay a loyal customer to your café for 5 years. This means the revenue generated over this period is £1380 of which you make a gross profit of £1104 over the same period.
Ok, we can argue about the figures quoted in the above example. However, the principle of the Lifetime Value of a Customer remains whatever number variable you decide to use. This is why creating customer loyalty is critical to enable any business to be sustainable. Customer loyalty is a business imperative.
How can I improve the Lifetime Value of a Customer in my business?
Of course, there are many tactical things that you can do to improve the Lifetime Value of a Customer such as:
- Improve the skills of your team – and not just the ones on the front line either. Having a truly customer-centric business means that internal customer service is paid attention to as well as those who interact with external customers either face-to-face, by telephone, online etc. At Beyond Theory, we believe that if you are not serving a customer then you should be serving someone who is.
- Make sure your products and services meet the needs of your customers – even if the needs of your customer change. Undertake regular surveys with your customers to discover their needs and wants. Keep your eyes and ears on the horizon to spot changes in trends.
- Controlling costs. Use measures such as cost-income ratio to ensure that your expenses remain aligned with your income so your business remains productive as well as competitive.
- Being responsive to fluctuations in prices – although not all customers are price sensitive many will be.
Whilst up-skilling your team and reacting to market conditions will be necessary to help safeguard your customers’ loyalty, you may also want to take more strategic action such as:
- Educate your team members to the importance of customer loyalty. Avoid making assumptions that your team know and appreciate how the Lifetime Value of a Customer arithmetic works.
- Consider loyalty schemes and/or discounts for customers who continue to purchase your goods and services. Make sure these are genuine, offering tangible value, and not gimmicky.
Link your Lifetime Value of a Customer data to other key business metrics to understand how customer loyalty drives your business decision making.
Net Promoter Score and Customer Effort measures have their place. However, don’t ignore the Lifetime Value of a Customer measure. Looking after your existing customers is far less expensive than gaining new ones.
It is also worth remembering that loyal customers quickly become your biggest advocates and therefore become your strongest marketing asset.
Director & senior consultant