Customer Lifetime Value (CLV) can get a little tricky, but I’ll try to make it simple. By now you’ve probably heard the term yet may not fully understand how to use it effectively, if at all. That’s because every “Tom, Dick and Mary Marketer” have done their best to make it more complicated than necessary.
The hardest part of calculating CLV is figuring out exactly what your customers’ “lifetime” really is…. and the only accurate way to arrive at that number is by getting, storing and analyzing your customers’ data. Period. If you’ve been in business for a while, this should be easy to get, but if you’re a start-up you’re going to have to estimate this based on industry standards.
Although there are several ways to arrive at CLV, the easiest is to calculate:
1. The average length of time a customer stays your customer
2. The number of transactions that an average customer will have with you during that time and
3. The average dollar amount per transaction
Multiply these together and you’ll arrive at a usable number. But remember, junk in, junk out… so make sure your original numbers are accurate!
Once established, you can use your CLV as a benchmark for developing a realistic customer acquisition (or retention for that matter) budget. For example, let’s say you find out that your average customer:
1. Stays with you for 5 months
2. Purchases something from you 3 times per month
3. Spends an average of $2 per transaction
In this case your average CLV would be $30. Based on this, it would be foolish to spend even $20 to gain one customer… you’d be left with little, or no, profit (unless of course, your margins are outrageously high). On the other hand, your customers may hang in there for 22 months, spend $20 per transaction and purchase from you a greater number of times. Since your CLV would be much higher, you could afford to pay more to gain a customer. Again, the specifics differ widely and there are many factors to consider, Also note that this does not include any costs associated with preserving this customer relationship. In the real world these must be included.
It is crucial that you understand your CLV and use it to guide your communication decisions! (A good book on this subject is Donald Lehmann and Sunil Gupta’s, “Managing Customers as Investments”… visit our website, www.StrategicMarketingAdvisors.com for a review and ordering information.)
3. Your specific goals, such as: * Acquiring “x” numbers of new customers * Increasing the number of current customer transactions * Increasing the length of time your customers remain your customers
4. Proposed media costs and actual/forecast response and sale rates (you can find these out online or from any reputable advertiser)
Once armed with this information, you’ll be in a good position to choose. Here’s an example of how this might work. Let’s assume the following:
* I am a widget retailer
* My goal is to get 1,000 new customers this year
* I will get 200 customers whether I do “anything” or not… (for example word-of-mouth, walk- ins, etc.)
* That means, I need to acquire the remaining 800 using some form(s) of advertising
* I can spend $40,000 to “buy” these 800 new customers
* My CLV is $40
* After careful consideration, I decide to conduct a direct mail campaign
* Based on my careful research and experience, I know that I can sensibly assume that 1% of my audience will respond by calling (called a “response rate”) and that 80% of the responders will become new customers.
* Given this forecast and my goal of 800 new customers, I know that I’m going to have to mail out 100,000 sales letters.
* As luck would have it, the cost to create, print and mail one letter is 37 cents (using 3rd class postal rates) which comes to $37,000… leaving me with a $3,000 “fudge factor”
So, let’s see where I stand…
1. The campaign cost is well within my budgeted amount of $40,000, my forecasts are reasonable based on industry standards and experience, and can realistically accomplish my goals. So everything is perfect, right? Wrong.
2. 800 customers with a CLV of $40 will result in revenues (over time no less) of only $32,000! That’s called a losing proposition!
What should I do?
1. In the short term, find out if there are less expensive advertising vehicles that may bring you similar results.
2. Find ways to reduce the direct mail costs without sacrificing response and sale rates (e.g. one color vs. four; lighter paper stock).
3. Identify ways of increasing the sales rates (for example beef up the offer; send to more people - you’ll get economies of scale this way so the per piece price will drop dramatically and you’ll acquire more customers)
4. Offer added products to increase your customer’s average transaction amount
5. Institute robust retention programs aimed at increasing the longevity of your average customer
Although this is a very simple example of how CLV works, it clearly demonstrates how important understanding it is to your business. Without considering CLV, you’ll be shooting in the dark - potentially wasting thousands of dollars and commiting serious, or even devastating, blunders.
Copyright 2005 Mary Eule
Mary Eule specializes in helping small and medium-sized businesses get and keep profitable customers. Formerly a Fortune 500 marketing executive; founder of two successful small businesses and award-winning speaker, Ms. Eule is President of Strategic Marketing Advisors, LLC. and co-author of a new book, “Mandatory Marketing: Small Business Edition”.
She has a BA in Journalism/English from the University of Maryland and earned her a master’s degree in marketing from Johns Hopkins University. Log onto her website: http://www.StrategicMarketingAdvisors.com for free articles, newsletter and helpful marketing tools, tips and templates… and/or to purchase the book.
Have you ever worked on a project that didn’t end up the way you intended? Maybe it was something as simple as sprucing up the garden. It could have been as ambitious as starting out on a new business venture. Whether a project succeeds or fails can be simplified by how well the following three basic factors were done.
- Clear end result
- Taking corrective action
- Continuing until the project is successful
In Part I of this series of articles I will discuss the concept of having a clear end result in mind.
While a clear end result is often thought of as a goal, it is actually a much more precisely defined goal. Some people think of goals as making lots of money by the time they reach a certain age, or some want to be good at golf. The difference between a “clear end result” and what others define as “goals” is specificity.
“It has to be around here somewhere…”
If you don’t know what the end result is, how can you ever take effective action to get there? For example, if I wanted to make “a lot of money” by the time I was 30, then how do I even begin? Does a lot of money mean $100,000 dollars or $10,000,000? While I have never made $10,000,000, the plans and actions that a person would need to take is much different than a person who wants to make 100,000 a year or 50,000 a year. It’s a cliché — but true, “If you don’t know where you are going, then any road you take will get you there”.
If you never take the time to define your end results, then you will find that you will end up nowhere near where you wanted to end up. From a purely motivational perspective, vagueness has no excitement to it. If I just want to be good at golf, there is not a whole lot there that is going to get me to the driving range or to the golf course. If I want to be better at golf then somebody who irritates me, then I have a very clear bar to measure myself against, and a lot more motivation to reach my goals. Vague, pie in the sky goals have no power to motivate and make any planning towards achieving success impossible.
Most people run the projects in their lives with a vague idea of how they want things to turn out. Doing what everyone else does will get you average results. Decide on how you want things to turn out. You may change that decision as you move along, but it is much better to keep things clear from the outset rather than vague. The word “decide” means “To settle conclusively all contention or uncertainty about”.
Cut yourself off from all other vague notions of thought and give yourself permission to have a crystal clear focus of your outcome. A clear outcome has a clear indicator of success. If you’re currently working on a project, then do the following steps.
Action Steps:
On a clean piece of paper answer the following questions:
- What do I want out of this?
- What is the project supposed to accomplish?
- What is the bare minimum that I could be happy with?
- What is the best possible outcome for this project?
These questions are to help clarify your thinking. A lot of books will tell you to dream big, which is a great thing, but if its too huge your mind can shut down on it. Build
a stairs to the top of your mountain, you don’t need to jump to the top tomorrow.
If you are coming up blank or with some uncertainty about defining your goal, then ask yourself the following questions:
- What is keeping me from defining my end result?
- Is what is keeping me from defining my end result more important to me then the kind of results I could have?
Remember: Your end result can change over time, so get started!
Charlie Hung is the founder of Vanguard Coaching which blends modern spirituality and psychology into a joyful and practical way of living. http://www.vanguardcoaching.com
When it comes to home accessories, baker’s racks have long been a favorite of consumers due to their versatility, beauty, and practicality. In addition to adding that special element of style, a baker’s rack is also very practical in that it can be used for extra shelving, storage space and/or as a work center. This multi-purpose nature of the baker’s rack is what makes it so popular and the perfect addition for any kitchen or living space.
The ability of the baker’s rack to work well with any décor is also one of the reasons that their use is so prevalent today. Baker’s racks can be incorporated into the décor of contemporary homes, country cottages, urban dwellings, formal homes and almost any decorating style that you can dream up.
Baker’s racks are also available in a wide range of styles and materials to suit your particular decorating style. You can make your selection from pieces made from all types of finished wood, metal and wrought iron, or a combination of materials.
Choose bakers rack styles such as romantic, contemporary, country and classic. Or customize your decorating style with Nantucket, Florence and Normandy pieces, just to name a few.
Are you lacking space, but still want that added touch that only a baker’s rack can give? Why not accent your living space with a bakers rack nestled innocently in the corner of your favorite room? This could be the perfect solution for crowded kitchens with little counter space, or corners that need a little something special. No matter whether you prefer the sleek lines of the contemporary style or the romantic swirls of the country French style, you can find a corner baker’s rack to fit your personality and budget.
Maybe you have a problem with too much empty space, and you want to bring in large design elements to cozy things up a bit. If so, you might enjoy a large baker’s rack such as the contemporary Serra baker’s rack. This piece boasts a beautiful cherry finish with an intricate wrought iron storage space, and would make a perfect focal point for a large space.
If none of these styles suit your needs, perhaps something a little more practical is in order. How about a copper-finished baker’s rack that has been intricately and beautifully sculpted using wrought iron? These pieces are perfect for housing collectibles and solving storage issues. Many also come with wine and wineglass storage.
The best thing about baker’s racks is their affordability. Baker’s racks of high quality and durability can usually be purchased for just a few hundred dollars. Of course, as with anything, you can spend more if your tastes and wants compel you to, but, for the most part, the addition of a baker’s rack to your space can be the most affordable solution to many design dilemmas.
So if your kitchen or living space is missing that special something, give some thought to purchasing a baker’s rack. It may just be the thing that you were looking for.
Jennifer Akre is a successful business owner of numerous furniture websites such as http://www.GourmetDecorStore.com. Her websites offer product and information about bakers rack styles, kitchen decor and other furniture for your home or patio.