Customer lifetime value isn’t just another high level business metric.
Unlike commonly used and well understood values such as your company’s gross profits and net expenses, customer lifetime value can tell you what your company is doing well and what it can work on in just minutes. And if you have a customer relationship management system such as Salesforce Essentials, your company’s customer lifetime value can be accessed with only a few clicks.
But what is customer lifetime value? Better yet, how does your CRM system calculate it? Let’s dive a bit deeper.
Your Most Important Asset
Customer-centricity is a term thrown around quite a lot in the modern business world. Previously, companies focused on building a product and then trying to market how it meets the needs of consumers. That’s not the case in a customer-centric organization.
Instead, businesses work to identify the needs of their customers and develop product lines to meet these needs. It’s a system that is cost effective since your company will no longer need to invest in products with questionable customer demand. More importantly, however, it makes your company more dynamic. An organization built around the consumer is ready to evolve as consumer tastes change.
Customer lifetime value helps your company’s management team spot emerging customer needs your products aren’t meeting by putting a number to the organization’s retention and customer development efforts. Being able to see your company’s retention rates is great. Putting a dollar value to the retention rates is even better.
So, what is factored into your company’s CLV? The formula looks like this:
CLV = GML * (R1+D-R))
In this case, GML is the gross margin per customer lifespan, or the amount of revenue a customer brings in less the cost of servicing them. R is your average monthly retention rate across all customer accounts, and D is the monthly discount. The discount rate is related to the time value of money and should be estimated based on recent inflation figures.
Once you have a CRM system in place to store all of your customer data and analyze it instantaneously, there are a number of insights you can put to immediate use.
Here are a few.
- How Well Your Customer Success Team is Performing
Unsurprisingly, in a customer-centric organization, the customer success team plays a key role.
Members of the customer success team are the eyes and ears of the organization. They witness firsthand the emerging needs of customers and can help them develop personalized solutions.
Their job doesn’t end with keeping customers onboard, though. Customer success managers should focus relentlessly on developing customers through cross-selling and upselling. At the same time, they should be working to promote referrals among the most satisfied customers.
You can judge the effectiveness of their efforts by closely monitoring CLV. If aggregate CLV sharply drops between quarters, there’s likely an underlying issue with either customer development or retention. You can initiate a conversation with your organization’s customer success leaders to pinpoint growth areas and use the CLV data as a launch point.
- What are the Characteristics of Your Most Valuable Customers
No two customers are the same. But many are similar.
Regardless of whether you sell directly to customers or to other businesses, there are likely similarities between some of your most best customers. They might hail from the same geographic region or engage with your marketing efforts at a higher than average rate.
In any case, you need a way of parsing the customers that provide your business with the most revenue vs. the most profitable customers. If your company spends a lot to acquire and retain a particular customer or group of customers, you’ll likely want to avoid bringing on similar accounts.
After identifying who your most profitable customers are, you can begin developing sales and marketing strategies aimed at reaching prospects similar to them. It’s a more targeted form of acquisition that can lead to sustainable growth at your company.
- It Can Tell You Which of Your Programs Are Working—and Which Ones Aren’t
Many of us have experienced a moment when we feel we’ve come up with a million dollar idea. Unfortunately, modern businesses don’t just entertain any idea. There needs to be data backing it.
CLV offers this type of evidence. For example, imagine you’re the owner of a business. Your company’s aggregate CLV steadily increased for a few years but has since flatlined. You explore your options and learn offering premium services often leads to getting additional value from your most valuable customers.
Do you take the offer or not?
Without the CLV data, you might outright reject the idea if you see yearly revenues steadily increasing. With the granular insights provided by CLV, however, you know the premium service offers the potential to inject new life into your business.
CLV data gives you assurance the decisions you make as a manager aren’t simply rooted in intuition but in the real time performance of your company as a whole.
If you want your company to have access to this form of granular data, we can help. We now offer Salesforce Essentials, the number one CRM option for small and medium sized businesses.
Contact us today for a free consultation!