As a marketer, you invest a significant amount of time in your print and multichannel campaigns. It’s essential to understand what (and who) brings in the most revenue. With traditional models of evaluating success, the emphasis is placed on immediate results. But is this the best way?
Let’s say you do a campaign, and Customer #1 spends $150 with you. However, this customer buys once, then never comes back again. Customer #2, on the other hand, spends $75 with you, but then returns to buy again, and again, and again. Which one is more valuable? Initially, Customer #1 seems to be the more valuable one. But it is Customer #2 – the one who keeps coming back – who ultimately delivers greater profitability. This is why it is important to understand (and invest in developing higher) Lifetime Customer Value (LCV).
Lifetime Customer Value is defined as the dollar value of a customer relationship over time. It is this model that drives the marketing decisions of many service-based businesses such as auto clubs, athletic clubs, and subscription-based music. In an LCV model, the value of each customer isn’t determined by a single transaction. It’s determined by the recurring revenue from that customer over months or even years.
To start thinking about your customers in terms of LCV, ask questions like,
- Who are the customers who spend the most money with you within a six-month period? How about 12 months? Three years?
- What does a high-LCV customer look like? What does a low-LCV customer look like? How are they the same? How are they different?
- How can you turn a customer with a lower LCV into one with a higher LCV? If so, how?
Understanding LCV is essential not just for evaluating which customers are the most important to your marketing efforts, but also in developing the profiles of the types of customers you want to attract moving forward. You want to go after the right customers who will deliver the best results. A critical element of marketing strategy, understanding LCV helps to not only drive better long-term marketing decisions, but – more importantly – also helps develop symbiotic customer relationships that drive sales for years to come.
