By the end of last week’s article it had been established that existing customers, or ‘retained customers’, are an excellent source of business as they contribute greatly in turning the dial of a company’s fortunes, and therefore call for strategies to maximise repeated businesses and the lifetime value of such customers.
Aside from a brand simply trying to retain its existing customer base for the sake of it being less expensive, it’s important to note that selling anything to anyone new is also far less likely. Existing customers are 50% more likely to buy from you than new customers. It’s been widely established through research that, for the most part, the probability of selling to a new customer hovers in the range of 5-20 percent, whereas selling to an existing customer sits in the range of 60-70 percent.
A company is more likely to retain its customers for longer period and therefore derive a high Customer Lifetime Value (CLV) when it offers a great to memorable customer service experience. Customers are far more likely to stick around and make use of products or services which deliver and guarantee superior brand knack. There is even an added advantage to such brands when consumers are looking for auxiliary services. Regulars are more willing to work with a business they’ve had a great experience with than to find something new. They have the propensity to spend 31% more when compared to new customers (same research as above, per Invesp). Indeed! Getting customers to come back – over and over – is all about viewing every customer as a lifelong stream of income rather than a transaction.
Maximising Advertising Takings
It is often said that doing business without advertising is like winking at a girl in the dark. You know what you are doing but nobody else does. Some businesses may therefore not be able to do away with advertisement; however, the associated budget is increasingly becoming unbearable to many a venture. Conversely, there exists a cheaper but equally effective form of making a product or service well-known to consuming publics: ‘word-of-mouth’ is the best kind of advertising that money can’t buy! Undoubtedly, it is a type that can have an enormous effect on a business. It is priceless! People are considerably more likely to take the recommendation of a friend, colleague or family-member than they are to heed the guidance from some sort of advertisement or online review. It takes a striking customer service to create that army of raving fans to champion a product or service.
Uncovering Customer Lifetime Value (Clv) to a Business
Unforgettable customer experience is key in driving loyalty, retention: and it even becomes a great multiplier for a brand.
The first rule of any business should be to retain customers and build a loyal relationship with them, thereby avoiding customer acquisition costs. Customer equity is therefore the cumulative value generated by a customer for a brand. This should not to be confused with the amount a customer has paid. It is the value or ‘equity’ a particular customer has to a business. Equity, implying future value, after considering acquisition and retention costs. This can be expressed as:
Customer Equity = Viral Coefficient x CLV – (Acquisition + Retention). Coefficient is certainly not a new word to Ghanaians; nonetheless, for the many who are not in the SaaS, PaaS or IaaS world, they are herein dissected:
Viral Coefficient is the number of users or referrals a user can generate for a brand. The viral cycle on the other hand measures the time an initial customer approaches a product or service and when their friends or families decide on their own to take a look.
Customer Lifetime Value (CLV): is the sum total of money a business predicts to make from a customer. This includes cross-selling and upselling.
CLV can help in a great deal to determining a business’ present and future success. It’s often an overlooked metric, but it can accurately predict the worth of a customer to a business. A customer’s value to a company can be known through: ‘recency’, frequency and monetary value (RFM) of a company’s patron over a period of time. RFM is a very useful technique for categorising customers from least valuable to most valuable.
- ‘Recency’ is about how recent a customer’s transaction was. A customer who made an acquisition recently is more likely to make a repeat purchase than one who hasn’t sought the service or product in a long while.
- Frequency is concerned with the number of transactions a customer consistently makes within a given time-frame. A customer who consistently makes purchases is more often than not likely to continue coming back than one who does so rarely.
- Monetary value refers to the amount of money a customer has spent within that same time-frame. A customer who makes larger purchases is more likely to return than one who spends less.
CLV gives crucial guide as to how much money a business should be spending on acquiring customers, so an indication of how much of a value they bring to a business in the long run can be ably determined.
The expenditure in acquiring new customers can be known quite well by simply dividing total marketing/sale budget within a specific time period by the amount of new customers gained in that time-frame. The resulting number gives the average amount that’s spent every time a new customer is acquired.
The difference between a company’s customer lifetime value and their cost per acquisition is the return on investment, or ROI. That’s the amount of money derived out of a customer relationship after a deduction of the money spent to kick-start the relationship in the first instance. Therefore, to stay profitable all that’s required to be done is maximise a brand’s ROI.
Instead of just racing just to keep heads above water, corporate decision-makers should be able to understand and know which customers they need to be focusing on; and more importantly, why they should be focusing on same.
The most appropriate customer lifetime value and cost of acquisition cost (LTV/CAC) ratio is 3:1. It is a figure hovering around this range that signals the efficiency of sales and marketing efforts. Improvement in a company’s customer lifetime value can actually serve as a benchmark on how marketing impacts customer profitability.
In effect, it can be said that Customer Equity is the total future cash flow value of a customer. This includes their propensity to recommend and use a particular product or service, and also includes the length of time they stick around as a customer or become a repeat-buyer. The longer a customer sticks around, the higher the probability of them recommending your products and services to their colleagues and friends. The longer a customer sticks around, the higher the probability of them buying a lateral product. This is why loyalty has a direct impact on future cash flow; and most importantly, sways a brand’s bottom-line positively.
To be continued…
The writer has two and half decades of demonstrable professional working experiences and solid theoretical background in many disciplines: such as Finance, Accounting, Human Resource Management, Risk Management, Philosophy and others. Henry can be contacted via [email protected] or 0244 65 16 63 / 0208178791