The Lifetime Value of a client or customer
How do you Measure it and Why is it important?
1. How do I work it out?
The traditional method as defined in Wikipedia:
Customer lifetime value (CLV):
The present value of the future cash flows attributed to the customer during his/her entire relationship with the company.
In other words, how much you can sell to a customer in the time that they remain on the books.
2. This Value as a number
We can all understand this methodology and how it neatly provides us with an amount of money that we then allocate to a client as their worth to us as a business. Whilst this does have a value, as explored in the next section, I think it misses the point as to how well managed supplier/customer relationships can provide additional value for extended periods.
3. Why is it important to understand this?
The understanding of the Lifetime value of a client is a key component in developing real Competitive Advantage when negotiating with new clients. In situations where you are in competition with other suppliers, and price becomes an issue, this knowledge will safeguard you against under quoting, and rather than being profitable, becomes a loss making piece of business.
4. HIDDEN value of Client relationships
In an open and mature trading relationship I believe it appropriate that the Lifetime Value of a Client should be so much more than simply how much we can sell to them! Here we briefly explore some of the other benefits that successful relationships can give rise to:
4.1 Referrals
We all seek affirmation of our choices when buying new products or services. Who better to do this than someone who is already using the provider?
4.2 Brand enhancement
If you are providing your clients with a real value added service, the value of the Brand will continue to grow as you develop a reputation as a business that really cares about its customers and relationships. This enhanced perception of the Brand works not only externally with your clients and other stakeholders, but also internally with your staff and communicates a set of values that say you really care about your customers.
4.3 People development
Your people can benefit from great Intrinsic motivation if you have a policy of listening to customer issues and providing support in whatever way possible. On the other hand constantly ignoring customer complaints and losing business is a significant de motivator.
4.4 Culture development
When businesses really start acknowledging and developing these Hidden Values the culture of the organisation develops in a meaningful way and the business model becomes ever more sustainable.
4.5 Who are the easiest people to sell to?
With existing customers you will already have broken down the Trust barrier, and there will be points of contact between the respective organisations, most importantly at the buyer/salesperson level. When you have developed a new product or service that may be valuable to an existing customer it is much, much, easier for the said salesperson to call on this relationship than to start with a cold call into a new lead, even if this has been developed by the marketing function!
4.6 Self-fulfilling prophecy
It goes without saying that if your organisation cares about the lifetime Value of Clients, this Value will increase and the business will become more successful on all levels.
5. Why is it SO important to understand this?
It is imperative that this Hidden Value is understood by everyone in the business, not just the Sales and Marketing teams, for truly effective client retention strategies. None of us like being ‘just a number’ either as an employee or as a customer, and that is what we are in danger of doing if we simply apply the numeric Lifetime Value of a customer.
If we can truly work with our clients to make sure that we are listening and responding to their needs and concerns over and above the traditional ‘arm’s length’ supplier relationship where the job is done once the goods or services have been provided, this is the recipe for a long and mutually rewarding relationship that works for everybody.
If you have any comments on this article or would like to discuss any aspect of it please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: cameraburps