Customer Lifetime Value – Finding The Gift That Keeps On Giving
My Kindle got a good workout during the holiday break and one book that stood out as worth a comment was the Arnold Schwarzenegger biography – Total Recall. Man – what a motivated soul Mr Muscles is. Anyway, one part that relates to online marketing is his life in movies. Trust me there is something of value here.
Apparently when a movie was getting close to release the team would test screen what they had so far to an audience to survey their reaction. Having someone say they liked the movie wasn’t enough. They were looking for those who said they would rave about it to their friends whilst also seeing it multiple times themselves. Great scores in both these areas nearly always produced a fantastic result at the box office. And conversely low scores almost always meant it was time to re-shoot parts of the film to get things back on track.
Now I realize that not all businesses have the budget that a movie studio may have to “test screen” their product. That is fine. Fortunately for most businesses who have been trading for a while a lot of the answers can be found in their customer database.
What you are looking for is your customer’s expected lifetime value. This is a prediction of net profit amount attributed to the relationship they have with your business. Think of it in rather crude terms as the value of each of those customers who decide to come back again and again – just like those that did the same to see Arney’s latest classic. The more times they come back – the more they are worth.
It’s a simple concept to grasp but one rarely known by business owners.
For instance – last month I asked three business owners what the expected lifetime value of their customers were and received exactly the same response from each.
“I have no idea.”
All three provided a product or service that would be purchased multiple times by their customers over a twelve month period and had been trading successfully for many years. Even so, neither knew the amount.
“So what’s the problem with that?” I hear you say. Each is surviving well. Profits are being made. So why bother spending valuable management time digging out this fact? The simple answer being that not knowing this fact is going to make your future online marketing efforts a challenge.
You see each company existed within a category that was becoming more competitive online by the month. This was naturally pushing up their cost per lead and unless they knew their customer lifetime value they could end up spending more per lead than they would return in profits for the life of the customer. Not a happy space to be in as the year starts to ramp up.
I can guarantee that a high proportion of your competitors will be in exactly the same space as these business owners. It’s just so much easier to think this way. It lets you treat all customers the same. Plus you avoid the hassle of allocating sales to customers to locate those that really do buy more than once.
But you are smarter than this. So don’t be afraid of the data. Get stuck in there and dig it all out for everyone to see. Here’s what may come up.
Scenario #1 The gift that only gives once.
I have seen a few customers uncover the sorry tale that this reveals. Yes you have a product that should be bought many times during the year by the same person but No none of your customers are taking you up on this.
All of those transactions were driven from new customers, with a fair dollop of marketing spend attached to them, buying for the first and last time. Lot’s of sales but hardly any profits. Some serious triage is required at a product or service level to sort this mess out and get people buying again. But once sorted, the results can be amazing as a new stream of repeat revenue floods the business with practically zero marketing costs attached to it.
Scenario #2 The gift that keeps on giving – but to just a select few
A step in the right direction this time. All the data analysis turned up some good news – there is a small selection of customers who bought more than once. Now all you need to do is find out what makes these people so different from the rest to make it easier to find more of them.
One customer I worked with found out that everyone of their repeat purchase group had a rural postal address way in the back blocks of the NZ countryside. Another sold a cosmetic product that were being purchased by a certain ethnic group. Neither could see this in their data beforehand but now, once revealed, it heralded a new approach to marketing to find more of these groups.
Scenario #3 – The gift that keeps on giving – to everyone.
Occasionally this one comes along and what a nice surprise it is when it does too. This is when the data shows a broad range of customers who are doing exactly as you hoped they would – buying more than once during the year.
Now it would be too much to ask for every customer to do this – so there are still a bundle who do the single purchase – but still the good news is there for all to see. The job now remains to a) follow the marketing thread back to see where these multiple purchasing customers came from so you can get more from this space while also b) motivating them to keep doing what they are doing and finally to c) explore ways to get more customers into the phase of purchasing again and again.
So there you have it. One goal for 2013 would be to tune your business so that scenario #3 is for you a reality. By linking your customer database with your online marketing activities you can go searching for those customers that have the highest potential of delivering a super duper lifetime value.