The Importance of Customer Lifetime Value and How It Impacts Your Business

As a marketer and business owner, you spend a lot of time researching your industry as well as the desires and preferences of your customer base. To attract the right customers to your business, you need to be able to predict the value each individual relationship will have. But, in order to do that, you also need to establish a strong customer relationship from the very beginning. Whether you’re in a multi-faceted or niche market, understanding your customers is a key component to longevity and success. Using the customer lifetime value metric is a tried and true method of acquiring and retaining the right customers for your business.

We’ve talked about how to improve your customer lifetime value in a previous post, but now let’s discuss the importance of customer lifetime value and how it can help you grow your business.

What Is Customer Lifetime Value?

In case you need a little refresher, customer lifetime value is a metric that measures the overall value a customer has for your business. Although this is typically calculated in terms of dollars and cents beginning from acquisition and extending throughout the lifespan of your relationship with each customer, it also goes a lot further than that.

The lifetime value a customer brings to your business has to do with how much you spent to acquire that customer, how much you spend over time to retain them, as well as the nature of the relationship you have with that customer.

Are they someone who’s interested in buying only one product or multiple products from you? How likely are they to recommend your business to other people they know? That’s the sort of thing that the customer lifetime value metric can help you determine. And based on that metric, you can also determine which marketing techniques are having a positive or negative impact on your relationship with that customer and make adjustments as needed.

How Can Customer Lifetime Value Help You Nurture Customer Relationships?

Customer relationships are more fragile than you might think. One moment you’re doing everything right when it comes to catering to your customers’ needs, but all it takes is sending one irrelevant promotional e-mail too many to set them off.

Paying attention to what your customers want is an essential aspect of nurturing that relationship and helping you avoid unnecessary conflict. Here are a few reasons why you should focus on nurturing customer relationships:

It’s a Benchmark for Future Growth

Customer lifetime value can help you create brand loyalty, which essentially leads to repeat businesses. The more your customers engage and share positive interactions with your brand, the more likely they are to continue supporting your business. Not only that, satisfied customers are also more likely to leave positive reviews if you ask them to and they’ll also happily recommend your products or services to others. Word-of-mouth advertising is the best form of free marketing you’ll ever receive because other prospective customers are more likely to trust a brand that’s been recommended to them by someone they know.

Categorize Customers Based on Their Value

Of course, all customer relationships are valuable to your business, but not necessarily to the same degree. Say, for instance, you offer a subscription-based service or product with multiple options for delivery frequency. The customers who are likely to purchase a more frequent or long lasting subscription from your business generate a larger profit, which means in monetary terms, they have more value.

That’s not to say that you shouldn’t treat customers with less frequently delivered subscriptions with the respect they deserve, but it does mean that in the grand scheme of things, they’re probably only interested in one specific aspect of your business. Whereas, the customer with the more frequently delivered subscription is actively supporting your business more often. Knowing the difference and categorizing these types of customers accordingly can help you determine who needs the most attention and when.

It Helps Determine the Value of Your Business

The value of your business is based on a few mitigating factors: customer satisfaction rates, your overall profit margins, and the success of your marketing strategies. Calculating CLV while your business is still in its infancy is challenging because there may not be enough data to indicate where you stand. Despite having great sales and acquiring and retaining a large customer pool, most businesses don’t actually break even until about the five-year mark. By that point, though, you should already have a strong idea about where your business is headed. Nurturing customer relationships can help give your start-up or small business a good sense of which direction it should be going in.

Helps You Create a Feasible Marketing Budget

Once you’ve gained footing in your industry and a strong understanding of what your core customer base is expecting from your business, you can then delegate funds toward aptly marketing those aspects of your business that you know are valuable. Two opposing, yet equally important aspects of running a business are customer acquisition and retention. The former is often more expensive than the latter, but it’s also essential to establishing a strong professional image for your business. The latter is instrumental in keeping your business going. Figuring out your customer lifetime value can help you determine how much to spend on acquisition and retention, respectively.

Facilitates Customer Relationship Management

Whether you’re catering to an elite clientele or the everyday working person, customer relationship management is important to growing your business. Understand that each customer is a unique person with specific preferences and that the same marketing schemes that speak to one person won’t necessarily have the same positive impact on another. With that in mind, you need to come up with a diverse customer interaction mechanism that allows customers to engage with your brand using a variety of mediums that pertain to your industry.

Customer Satisfaction Levels Speak to Service and Product Quality

Nurturing customer relationships increases the chances of positive interactions over the phone, via e-mail, through live chat, and on social media. Customer lifetime value can help you determine how satisfied your customers are with your service and product quality based on how long they’ve been supporting your business and how much money they spend on it.

3C Contact Services is a renowned call center that caters to small- and medium-sized businesses throughout North America. We’ve helped numerous companies build and nourish value-based customer relationships by providing exceptional customer service across a wide range of mediums. Contact us today to find out how we can help you grow your business.