Customer life time value
Go for a long-term relationship, not just a one-night stand
Many people would be familiar with the concept of Customer Life Time Value (CLTV). I recently became a real life example of this concept from the customer side of the counter. This highlighted to me the importance for all of us to keep focussed on CLTV in our business instead of going for the big sale on the first visit.
MY FIRST EXPERIENCE OF LYCRA
Along with thousands of other keen souls, I did the Great Victorian Bike Ride in November 2016. We had nearly 600km of travel on the bike to get through. I found myself engaged in, for me at least, the rather strange activity of inspecting various shapes, sizes and shades of Lycra in a bike shop. My wife and I were well looked after in this bike shop, with them even posting an item to us that had been out of stock.
Shortly after, we needed some additional gear for us and our youngest son, who also did the ride along with us, so we headed to our local bike shop around the corner. This time, we received a hard sell with the rather ludicrous suggestion that we each needed a new outfit for all 8 days of the bike ride, which would have put our bill into the thousands of dollars. Needless to say, we declined the offer and have since taken all our pedalling business to a bike shop that is much further away but with a more practical outlook on what their customers need and plenty of friendly advice.
Had the manager of our local bike shop taken the long view and focussed on our CLTV instead of going for the jugular, they could have had three loyal customers for many years to come. Instead, they got zip and we will now be spending our future bike dollars somewhere else, and it can get pretty damn expensive pretty damn quickly!
SO WHAT IS CLTV ANYWAY?
There’s a range of different technical explanations for CLTV available from a range of different sources, from Wikipedia to advertising executives to marketing books and everything in between. In keeping with my Keep It Simple Stupid approach (covered in a separate Blog post), I like to think of it in the following simple terms:
- CLTV = how much profit per transaction x how many times they buy per year x how many years they stay with you, less how much it costs you to land the customer in the first place.
Let’s throw some numbers in there as an example to see what it might look like:
- CLTV = $100 profit per transaction x 4 purchases per year x 5 years, less $100 customer acquisition cost = $1,900.
Compare this to going in for the kill on the first sale – sure, you might make $300 profit on that first sale (less the $100 acquisition cost), but there’s every chance you’ll lose the other $1,700 of potential future profit.
AND WHAT CAN IT MEAN FOR MY BUSINESS?
Focussing on CLTV rather than one-off sales lets you take the long view in your business and gives you the freedom to really think strategically about your marketing budget. If you’re short sighted about your customer acquisition costs and insist that the first sale must make a decent profit over the marketing cost, then you’re missing the big picture. What really matters is the CLTV!
If you really know your numbers and can be confident that the CLTV far outweighs the acquisition cost, then you can afford to be creative with your marketing, for example with strategic partnerships where you give something of value to someone else’s customers, or free samples on a promotion, or a no-obligation personal assessment. These things can cost time and money, but with the long view of CLTV in mind, the rewards can truly be worth it.
DO THE HARD CLIMB AND THEN COAST ALONG FOR THE PAYOFF
Continuing the pushbike theme, I see the CLTV concept as kind of like riding a big hill on a bike. You do the hard yards first with the big climb – that’s you generating the lead, investing the time and nurturing your customer, providing great service and great value. Once you make it to the top of the hill on the bike, you’re rewarded with a nice downhill run to coast along with minimal effort, just an occasional turn of the pedals and a tweak of the handlebars to keep you on the right path – that’s you with a happy, loyal customer who keeps on coming back to you because you looked after them so well in the first place.
The moral of the story? Always keep Customer Life Time Value in mind in every transaction you make – your aim should be to turn that first date into a long-term relationship!