The Challenge: Traditional marketing has often focused on getting the sale. Instead, marketers should focus on retention and how to keep more customers for longer periods. Customer Lifetime Value, (CLTV), is a simple equation for helping you calculate the value of increased retention.
By understanding the lifetime value of a customer, you can determine whether you are spending enough to keep and groom customers, and what the resulting revenue will be from ongoing, repeat, purchases.
Insert actual or estimated numbers into the following lifetime value equation:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).
Kellogg Professor John Parker explains, “Organizing marketing to improve the performance of three key ingredients–lowering acquisition costs, raising total margins, and reducing the churn rate–can be an even more powerful application of CLTV for CMOs.” Research from Bain & Company shows the increased value of customer retention versus acquisition:
| • | Acquiring a new customer can cost 6 to 7 times more than retaining an existing customer |
| • | Over a 5 year period customer attrition rates could reach as high as 50% if databases are left dormant |
| • | Businesses which boosted customer retention rates by as little as 5% saw increases in their profits ranging from 5% to a whopping 95%. |
When we focus marketing efforts on customer retention rather than acquisition and engage customers throughout the entire relationship, the result is an increase in the lifetime value.
3 Takeaways for Marketers:
1. Engage with customers at 3 points in the customer lifecycle:
| • | Pre-Sale: Understand their needs and preferences and begin engaging them accordingly. |
| • | Sale: Don’t think of the sale as a “close”. The sale is not the end; it should be the start of building a proactive, value-based, relationship. |
| • | Growth & Retention: The period between the last sale and the potential next sale is an opportunity for you to provide ongoing, proactive, engagement, and value. This is the time to gain a better understanding of your customers, why they purchase from you, what motivates their purchases, and how you can provide value between purchases, to keep them loyal and engaged. ERDM research shows that engaging and forming strong relationships with customers has 12 times more influence on retention and repeat purchases than customer satisfaction alone. |
2. Cut down on email blasts and send only relevant, preference-based communications. A powerful way of proving that you care about your customer is to cut down on email blasts and only send targeted and relevant communications and offers. Consumers resent brands that indulge in “spray and pray” blasts of irrelevant email. This is viewed as disrespectful of their limited time.
3. You are probably not spending enough on your top customers. Identify the top producing customer segments and revise your spending accordingly. See the visual above.
