What is the value of a customer?
What profit can they bring this week? This year? Over a lifetime? It may seem like a simple concept, but many small businesses have no idea what a regular customer is worth to their business. This creates two problems:
1. Ambivalence about customer retention. Many businesses are uncertain about how much to spend on customer retention. With a metric for measuring customer values, you can navigate appropriate parameters for retaining these people or expanding their business. Research shows that increasing customer retention rates by merely 5% increases profits by 25% to 95%!
2. Uncertainty about effective marketing. What is the number of new customers you’d like to attract, and what is an appropriate budget to do that? Defining customer value will guide your marketing strategies.
When acquiring new customers, estimating Customer Lifetime Value (CLV) provides a way to estimate their future revenue contribution to your company and how to use direct marketing to your advantage.
Take the Long View
Need an example? Here’s a sample:
In this scenario, a CLV of $150 estimates what one customer will spend after one year. When you send out a direct marketing campaign and $150 CLV customers respond, it’s important to remember that a client’s $50 initial purchase during this campaign may not seem profitable (due to the extensive mailing costs).
But rather than looking only at the figures for this initial campaign, you must consider the $150 these clients are going to spend over their lifetime. Here’s the breakdown of those stats:
Mailed/Cost Orders Received Initial Loss CLV Over 3 Yrs
10K @ $5K 100 ($2,500) $10,000
25K @ $15K 300 ($7,500) $30,000
45K @ $25K 675 ($8,125) $76,250
In the first mailing, was the loss of $2,500 worth the time and expense of one campaign?
Not upfront, but viewing this investment as a loss is shortsighted. With an understanding of Customer Lifetime Value, smart entrepreneurs can see that each mailing produced a response of customers who had a CLV that would bring net profits in the long run. In other words, investing $5,000 in a 10,000-person mailing (to eventually earn $10,000) brought a return of 100%.
Keep Them Coming Back
One thing smart marketers know is that, by increasing a customer’s CLV, they can earn more profits faster.
Here are just a few ways to do this:
- Keep customers engaged through value-packed content (e.g., educational newsletters, social media chats, personalized ad campaigns, or direct mailings that promote the tangible value of your latest products)
- Offer loyalty rewards programs or “special status” sales events targeted to the niche markets within your base
- Upsell more luxurious versions of your customers’ current products or packages
- Cross-sell similar (or complementary) products or services
- Incentivize annual billing cycle payments to reduce the churn rate of customers lost month to month
- Increase sales by bundling products and selling them at a lower price than what they would cost separately
- Increase pricing over time; or offer to “grandfather” current clients by keeping them at the existing rate as you raise prices for new customers
Your Customers Are Your Future
A customer represents the future of your success and your livelihood, and it will be difficult to thrive if you aren’t willing to risk or invest to attract new business.
Has the uncertainty of direct mail marketing kept your business from growing? Rely on our expertise! Metzgers offers simple ways to reach a mass audience for a price point that works with your budget.