What’s the lifetime value of a customer?
Textbooks will tell you it’s a complex formula that calculates the present value of future cash flows generated by a customer relationship. I know, your head is hurting already.
So rather than focus on the math, let’s focus on the four key aspects of a long-term customer that positively influence customer lifetime value.
- They already know your value.
Generating new business is expensive compared with the cost of selling to a customer you’ve sold many times before. The average U.S. company spends 4 to 6 times more to acquire a new customer than it does to keep an existing one. Moving your prospects through the sales process requires a costly mix of tools and resources such as advertising, sales resources, commissions and onboarding programs.
- They cost less to service.
When you work with customers for a long time, they become easier to service. They understand your company’s people, processes and values. You understand their business goals, priorities and communication preferences. Building this deep customer knowledge takes time, but it allows you to serve your loyal customers much more efficiently and cost effectively than new ones.
- They refer more business.
Loyal customers are more likely to recommend you to other businesses because they have a good relationship with you. Free and unbiased, these word-of-mouth referrals are a valuable form of lead generation, especially because other companies know that your customers have no motivation to recommend you unless they are really happy with you.
- They will buy and pay more.
Finally, long-standing customers are comfortable and confident that you will deliver for them, whereas new customers often need to be enticed with discounts, free trials and special offers. Long-term customers trust you, so they typically are willing buy more from you and pay higher prices the longer you retain them. In fact, customers who are fully engaged deliver a 23% premium in terms of share of wallet, profitability, revenue and relationship growth, according to Gallup’s State of the American Consumer 2014.
All of this adds up to a simple fact: The longer you retain and engage your existing customers, the more profitable those customers become to your business.