The lifetime value of a customer is important to any business because it directly affects your bottom line.
Once you recognize how valuable it is to keep your customers happy and engaged with your product or service—and how much it costs your company to replace a lost client—you realize the importance of reducing churn.
Of course, satisfied customers contribute more value to your business than dissatisfied ones, but you may be surprised just how much you gain by keeping your customers happy.
The Customer Lifetime Value Formula
You can find a variety of methods for determining customer lifetime value (CLV) online—like this CLV calculator from HubSpot—but it is important to understand what this metric means and how it varies depending on your business model.
Essentially, CLV is the amount of revenue a given customer will contribute to your business over the life of your relationship with the customer.
Say, for example, that you sign a customer to a one-year $10,000 renewable contract. In that first year, your company realizes the revenue of the contract, but incurs the cost of acquiring and onboarding. For each subsequent year that you can keep the same customer happy and they renew their contract, your company will likely realize much more revenue (since you won’t incur those same acquisition and onboarding costs).
Consider the Cost of Customer Acquisition
Knowing that your customers are valuable is important, but until you also determine how much it costs you to acquire a new customer, you cannot truly appreciate the value of this metric and the powerful impact it has on your business.
Do you know what it costs you to land a new customer, and how long it takes you to recoup this investment?
The cost of customer acquisition (CCA) includes all the sales and marketing activities you need to identify prospects and close sales—converting them to customers. This includes your website and online marketing, traditional marketing and advertising. It also includes the salaries, benefits and overhead of your sales and marketing teams.
To calculate CCA, add up all your acquisition costs for a period—a quarter, for example—and divide that total by the number of new customers you booked during that period.
When you compare your cost of customer acquisition to that customer’s lifetime value, what do you discover? In our example from above, how would you feel if acquisition costs you $8,500 or more? How many customers must you acquire to keep your doors open, let alone grow your company, if that customer doesn’t renew their contract after the first year?
Finding Ways to Retain Customers & Keep Them Happy
Finding ways to delight your customers is energizing to both your workforce, your customer base and your bottom line. The onboarding process is often the first true test of your relationship with a client and ensuring that it goes right makes all the difference. For most companies, that means exceeding their customer service expectations and expediting the onboarding process as much as possible.
The sooner you can get your customers up and running, the sooner they can realize the full benefits of the products and services that you have to offer. The more satisfied they are during that process, the longer they will stick around.
GuideCX is built for this. A B2B project management software that makes implementations and any other project transparent and engaging—no matter how many parties are involved.
To learn more, let us know when we can show you what we have built for you and your customers.
- Your Customer’s Perspectives with Tobias Kederer (Podcast) - July 13, 2020
- Ongoing Onboarding with Donna Weber (Podcast) - July 8, 2020
- Reducing Scope-Creep with Better Client Onboarding - June 7, 2020