Customer Lifetime Value: The Most Ignored Growth Metric
As a marketing strategy consultant, I’ve seen countless strategies come and go.
But there’s one metric that has consistently proven its worth: Customer Lifetime Value (CLV).
It’s not just a number; it’s a powerful growth engine that can transform your business.
So, what exactly is CLV?
Simply put, it’s the total amount of money a customer is expected to spend on your products or services throughout their entire relationship with your company.
It’s looking beyond the immediate sale and considering the long-term potential of each customer.
Calculating CLV isn’t as complex as it might seem.
The basic formula is: (Average Purchase Value) x (Average Purchase Frequency) x (Average Customer Lifespan)
For example, if a customer spends ₹7,500 per purchase, buys 3 times a year, and remains a customer for 5 years, their CLV would be ₹1,12,500.
I’ve found CLV to be particularly effective for businesses with repeat purchases or subscription models. E-commerce stores, SaaS companies, and service-based businesses can all benefit tremendously from focusing on this metric.
When it comes to service businesses, I’ve seen CLV work wonders for:
Professional services firms, Health and wellness providers, Home services, Salons and spas, Automotive services, Retailers (online and brick-and-mortar), Real estate developers, Financial services, Education and training institutions, Hospitality, IT services, Coaching and Consulting.
The Lethal Combination: Customer Lifetime Value and 80/20 Principle
Unfortunately, most entrepreneurs never orient themselves to see the long-term potential of customer lifetime value.
They don’t see the multiplier effect of nurturing customer relationships over time.
This oversight is particularly problematic for businesses spending heavily on customer acquisition.
If you’re pouring money into advertising without considering CLV, you’re likely not getting the full value from your marketing spend.
This is where the power of the 80/20 principle comes into play.
This principle suggests that roughly 80% of effects come from 20% of causes.
In business, this often translates to 80% of your revenues and profits coming from 20% of your customers.
Understanding and applying this principle can dramatically increase your CLV and overall business performance.
How a Furniture Retailer Leveraged CLV for Explosive Growth
Let me share a case study that illustrates the power of the 80/20 principle in boosting Customer Lifetime Value (CLV).
I once worked with a furniture retailer whose CEO was solely focused on customer acquisition, calculating return on advertising based on immediate sales.
When I dug into their existing customer data, I discovered a classic 80/20 distribution:
1. A vital few (roughly 18%) of their existing customers were responsible for 75% % of their profits.
2. Within that top 18%, we found another 80/20 split: 4% of their total customers (the top 20% of the top 20%) were generating roughly 75% of the profits.
I also noticed that customers who made a second purchase within six months had a 60% higher average order value.
However, only 14% of their customers were making that second purchase.
Applying the 80/20 principle, we implemented a targeted strategy:
1. We identified the characteristics of the top 4% of customers and focused on acquiring more customers with similar profiles.
2. We created a tiered loyalty program, offering premium benefits to the top 20% of customers to encourage more frequent purchases.
3. We developed a post-purchase email sequence specifically tailored for the top 20%, with personalized product recommendations based on their previous purchases.
4. We implemented a referral program that offered greater rewards to the top 20% of customers, incentivizing them to bring in new high-value customers.
5. We retrained the customer service team to provide white glove, VIP treatment to the top 20% of customers, including priority support and exclusive offers.
The results were significant:
1. The percentage of customers making a second purchase within six months increased from 15% to 28%.
2. The average order value for repeat customers in the top 20% increased by 80%.
3. Overall revenue increased by 42%, with only a 5% increase in new customer acquisition.
4. Most importantly, the value generated by the top 4% of customers increased by 120%.
If you notice, I have added a layer of leverage to the Customer Lifetime Value by applying the 80/20 principle.
This combination will create hypergrowth without spending massive amounts of money on advertising and other unproductive efforts.
I have learnt this approach from Perry Marshall, a Direct Marketing Veteran and author of the book – 80/20 Sales and Marketing.
Not all customers are created equal
In my experience, the businesses that truly thrive are those that strike a delicate balance between customer acquisition and retention.
It’s also crucial to view your customer base with a razor-sharp focus, segregating them into the vital few and the trivial many.
The common belief that “all customers are equal” may sound philosophical and customer-centric, but it can be detrimental in business.
Here’s my final take.
In recent years, I’ve observed a significant shift across most business categories.
The pendulum has swung heavily towards acquisition, often at the expense of leveraging existing customer relationships.
This imbalance is precisely why I’ve placed such strong emphasis on utilizing customer lifetime value (CLV).
While acquisition is undoubtedly crucial for growth, the often-overlooked potential within a company’s existing customer base is staggering.
I believe, in today’s competitive advertising landscape, the businesses that can redirect some of their acquisition-focused energy towards retention and CLV optimization are the ones that will see sustainable profits without increasing their marketing costs.
P.S — To Unlock Your Business’s Hidden Growth Potential – Book Your 30-Minute Strategy Session with me.
