Acquiring new customers is anywhere from five to 25 times more expensive than retaining existing ones. Yet, 44% of businesses concentrate on business acquisition with only 18% concentrating on retention of existing customers.
CUSTOMER LIFE-TIME VALUE
We give lip service to the importance of customers and clients. For businesses impacted negatively by COVID, whether we are B2B or B2C, maintaining, and indeed growing a solid base of loyal clients will be the difference between success and failure, therefore it is crucial to know the value of our most important asset.
Lifetime Value (LTV) is one effective way, businesses can understand this. LTV, also known as Customer Lifetime Value (CLV), while recognised as being important is often underutilised by businesses. A 2018 study by Criteo found only 34% of marketing businesses were aware of CLV and its importance [1]. In other words, 66% of businesses had no real understanding of the value of their most important asset.
In simple terms CLV measures the projected revenue from a customer or client over the lifetime of their relationship with a business [2]. For example, if a customer purchases $1,000 worth of products or services from a business over the lifetime of that relationship, and the total cost of sales and service to the customer is $500, then the CLV is $500 [3]. There are other more complex formulae that include metrics such as average order value, purchase frequency, gross margin, and churn rate [4]. For the purpose of this article, LTV has been kept to its simplest formula.
According to Harvard Business Review, depending on which study you believe, and what industry you are in, acquiring new customers is anywhere from five to 25 times more expensive than retaining existing ones [5]. This if nothing else is one of the crucial reasons why B2B and B2C businesses need to understand and be applying CLV.
Yet, 44% of businesses concentrate on business acquisition with only 18% concentrating on retention of existing customers. [6]
Given the costs of acquiring new clients versus retaining existing clients, businesses that concentrate on business acquisition are potentially placing themselves at risk [7]. Brands and businesses that factor in CLV give themselves more breathing room and perspective beyond the constant treadmill of acquiring new clients and allow opportunities to develop a more rewarding customer experience and hence build those positive experiences that encourage customer/client loyalty [8].
It is important to remember that ultimately, CLV is about the customer experience. This is more than what the customer or client is paying for the service or product, it is about loyalty and identifying what the client values and needs [9].
Understanding the values and needs of clients can be challenging, particularly with the move towards personalisation which has seen generic tactics and mass marketing being rejected by consumers who are now expecting and demanding bespoke experiences [10].
Client loyalty is also changing due to the impact of social media. Taking shopping as an example, the vast majority of shoppers (60%) will buy from whichever store has the best item/price. However, a closer look reveals an interesting generational split. Two thirds (65%) of 18–25-year-olds will aim to return to the same store to make repeat or replacement purchases. Those aged over 45 show the least loyalty with just 13% of this group on average describing themselves as likely to return to a store from the outset [11]. This example does not include the increasing impact of the shift to online shopping.
Understanding CLV can assist a business or organisation to target messaging to the person at the right time, to build customer loyalty and relationship [12]. Continuing the example of shopping, ongoing communications such as e-magazines and trend insights are a factor in securing the loyalty of one in ten (12%) of 18-34 years olds while event invitations impact the same number. Customer service and aftercare is the second biggest factor for those aged 55+ while ongoing offers for supplementary products and services are enough to entice around a third (30%) of clients to remain loyal [13].
CLV is a customer centric measurement that is essential for both B2C and B2B when it comes to business performance particularly given the shifting mindset in the current generations view of loyalty. While price and customer service will always be important; businesses need to be clear in their understanding of CLV to know what else clients and customers value and need as this will enable them to build an experience that meets these needs and increases client loyalty.
[1] Customer Lifetime Value (CLV): All You Need to Know [2021] (exponea.com)
[2] How to Calculate the Lifetime Value of a Customer (LTV) (thebalancesmb.com)
[3] ibid
[4] ibid
[5] The Value of Keeping the Right Customers (hbr.org)
[6] Customer Acquisition Vs.Retention Costs [Infographic] (invespcro.com)
[7] Customer Acquisition Vs.Retention Costs [Infographic] (invespcro.com)
[8] Gartner Blog Network
[9] Criteo-UK-Commerce-Marketing-Forum.pdf
[10] ibid
[11] ibid
[12] ibid
[13] ibid
