FACT: New customers do not contribute to the profitability of the businesses in the first two years after acquisition.
The acquisition of new customers can cost five times more than satisfying, retaining and potentially cross-selling and upselling to current customers. It is therefore vital that, as a business, the Customer Lifetime Value if understood and optimised.
According to Bain & Company, margins are boosted when companies simply retain current customers, estimating just a 5% increase in customer retention can have a 75% increase in a company’s profitability.
Customer Lifetime Value
Customer Lifetime Value is the gross margin value a customer will bring over their lifetime as a customer.
Customer Lifetime Value, is commonly referred to as CLTV. This is used by executives to understand how much a customer can generate for a business. It is also often looked at in conjunction with Customer Acquisition Cost. Organizations want to have customer CLTV be at least three times what it costs to acquire them. Sales initiatives undertaken are often tied to improving the average CLTV of the client base. Key to this is an effective account management focus within the business.
Here are 4 simple steps to help calculate the Customer Lifetime Value within your business
- Get Data ready & start segmenting. It is vitally important that you have accurate data to draw accurate information on clients profiles and their purchasing patterns.
- Calculate the average customer sale segment. Customer sale segment may be defined by, for example, customer type / Demographic / Product type, etc.
- Review how often your customer purchases from you (Average Number of Repeat purchases by customer type)
- What is the average retention time (months / years) of a customer? This means how often does your customer purchase from you in a specified time period.
To calculate the Customer Lifetime Value, simply multiple Average Customer Sale x Average Number of Repeat transactions x average time of a customer = Estimated Customer Lifetime Value £
This will help you focus your business on driving customer retention which, will result in increased business profitability.
How CRM can assist organisations with Customer Lifetime Value
A CRM system can benefits an organisation with its Customer Lifetime Value by creating a culture of best practice within the organisation. This culture helps the organisation focus on customer retention, customers repurchasing and customer referrals.
CRM also offers visibility to the management and control of the sales process. This visibility enables management to understand why, when, who and how opportunities are being won, stalled, or being lost. If it cannot be monitored, it cannot be managed. The visibility offered within the CRM system also allows management to make educated business decisions based on hard data.
ProAptivity are an independent CRM solutions provider. We focus on the implementation, training, and support of highly customised CRM software solutions. Our CRM software supported by our sales training provide customers with the tools needed to deliver successful sales process management.
Fundamentally, we help organisations embed CRM best practice throughout their organisation.
If you need help in understanding why my business needs CRM, maybe some of our eBooks could help! Alternatively visit Maximizer CRM or Pipedrive CRM for more information. Contact us today on 028 9099 6388 or via firstname.lastname@example.org. We can help you assess if your business is CRM ready.