The number you need to figure out to go to the next level

25th August, 2017

Customers are an important part of a business. In fact, without them, you have no business. Knowing exactly how much they’re worth is key to whether your business will flourish or not.

When working out how top take your business to the next level, one of the first steps you should take is to understand the Customer Lifetime Value (CLV) of a potential customer.

It’s a figure you can use to build out a customer acquisition strategy, including a marketing plan and lead generation activity schedule.

If you undertake these activities without a sense of how much any particular customer is worth to you, then you could end up wasting a lot of money.

So how do you work out how much a customer is worth to you?

READ: More on sales and marketing

How to work out your CLV

CLV for some industries can be very easy to calculate; and some it can prove much more of a challenge.

One of the industries which is traditionally very strong at working out their CLV is the insurance industry.

Let’s assume that their average customer will stay with them for about six years.

If average customer’s spend on insurance per year is $1,500, the company’s CLV figure is $1,500 x 6 years.

Or $9,000.

It’s about figuring out how much time an average customer stays with you, and the money they spend with you in that time.

This can be weekly, monthly, or yearly but the important thing is to get a baseline on how much the average customer is spending with you.

From here, you can do all sorts of cool things.

What do we do with these numbers?

Now we can use these numbers as a guideline for our lead generation and marketing activity.

Let’s say the insurance company wants capture a new customer, and they want budget accordingly for that capture and maintenance.

So, they may end up putting 10 percent of the potential customer’s CLV towards the capture of the customer.

On face value, spending $900 to capture a client who is worth just $1,500 in the first year seems crazy. But that, as we know now, is not the full story.

That customer is actually worth $9000, so spending $900 for a potential $9000 return seems a bit more reasonable.

Why is it important to know this number?

What if you could harness this insight to do some truly cool things, like offering a customer three free months of free service?

After all, if you have a baseline figure on how much you’re willing to get the customer into the acquisition funnel you have a basis on how much you can spend on acquisition activity.

CLV is important to understand so your business has a sensible approach to investing in lead generation.

If a client is worth $40,000 over three years, allocating $100 to try and capture them as a client isn’t going to cut it.

If you’re expecting to snare a customer with a free company pen and notepad, you may be in for a shock.

You could still get a result with that sort of level of investment but really, if your competitors have their heads screwed on properly, they’re investing much more than you.

Therefore, you need to spend a more realistic money for the value that the client will deliver long-term.

Using multiple touch-points, investing in demos, utilising hospitality and so on are much more consistent with your financial goal.

Heavily investing in marketing and lead generation upfront can put substantial strain on cash flow.

READ: How to manage your cash flow with good reporting

That’s why leading with a CLV figure can be useful for an established company but may not be suitable for one just starting out.

CLV can be a challenging number to work out.

But it’s there to give you a benchmark to the exact long-term worth of a new client and subsequently help you with developing your marketing budget accordingly, so it’s worth spending a bit of extra time to calculate it.