When analysing sales statistics or determining the success of a recent campaign, marketers all too often focus on short-term results. For example, did sales increase following a telemarketing campaign? Did customers respond to a recent special offer? Or was it an ad campaign on local radio that encouraged people to sign up for a newsletter?
Although short-term gains are important in business, they don’t always give us the full picture. In order to get a better understanding of the value customers bring to a company, and to improve customer loyalty, businesses need to look at the lifetime value of their customer base.
Why is it important to calculate the LTV of a customer?
Calculating the lifetime value of a customer (or LTV) is vital as it offers a better idea of how much money the average customer will bring to a business over the course of their association. Companies can then decide how much it’s worth investing to ‘win’ that customer. This can help to inform marketing campaigns, especially when it comes to high value B2B sales and long service commitments.
The formula a business uses to calculate the LTV of their customers will vary depending on their business model and the type of products and services they offer. Often, marketers use a formula like this:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).
Individual businesses will need to analyse their own customer base in order to create calculations that provide a valuable insight into customer spending.
What to do with LTV calculations
One of the most important reasons for calculating LTV is that it offers businesses guidance on how much to invest in their marketing. Often, high ticket sales involve significant investment, so businesses need to be confident that winning these high value clients is worth the money. Looking at the LTV of the average customer can therefore guide the marketing budget and help marketers to invest in the areas that bring the biggest results. For example, the cost per lead may be higher using a certain type of high quality marketing. However, if it brings in a number of high ticket sales and long service commitments, the investment will be well worth it over time.
How to improve LTV
There are a number of ways to improve the LTV of the average customer. Marketers can work to increase the amount customers spend with each purchase, improve customer retention to boost overall lifetime spend or work to secure larger numbers of high value B2B customers. All of these techniques require excellent customer service and communication as well as a comprehensive marketing strategy.
To find out more about improving customer communication and boosting business, explore our site or contact a member of our team.