Increase ROI by Understanding Customer Value

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Understanding Customer Value is vital to any business. Many business professionals refer regularly to the term Return on Investment (ROI) - but to truly calculate ROI from a campaign it should not only be measured by individual sales from the campaign, but also on the basis of the anticipated lifetime value of the customers you have acquired.

Not all customers are profitable

Many SMEs find their sales team may be spending too much time servicing customers who purchase only once, and then at a low value. Taking into account the time and resources spent on those customers, the ROI is likely to be exceptionally low or you may even be losing money on them.

Those clients with higher Customer Lifetime Values (CLV) should be the ones receiving the highest percentage of your time and resources - as it is those customers that will bring your business longer-term profits.

So you should identify which customers to invest in. The marketing used to reach and maintain contact with those with high CLV should include the more expensive and targeted techniques - such as direct mailers, brochures, account management, etc. For those with a low CLV, you might just opt to email them or use another low-cost communication method.

Segmentation and Targeting

Based on Pareto Law’s translation for business – that 80% of your sales come from 20% of your customers, it is surely vital to identify, segment and target that vitally important best 20%.

Taking that as a given, the first task you should consider is to calculate the CLV of each of your customers; from here you can create a scoring system or other method to segment them into tiers, and then define a strategy for each group.

Hugely simplified, the calculation for Customer Lifetime Value (CLV) is:

CLV = (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)

A more in-depth scrutiny including a Recency and Frequency value analysis from your data solutions provider would give a closer, more accurate insight. However, the above simplified calculation could still help you to make better informed targeting decisions in the future.

Long-term success as well as short-term wins

By identifying and segmenting your customers, based on their lifetime values, you can achieve more productive and cost-effective customer marketing.

Criteria can also be identified from your High CLV and Low CLV segments (and anything in between) to help inform future selection of the higher value prospects to target – which of them are most likely to convert into good customers.

Finally, undertaking insight into purchase history (transaction/basket analysis) can actually drive up CLV by identifying and highlighting up-selling and cross-selling opportunities.

  • What level of Customer Lifetime Value do you analyse or report on?
  • Have you identified your top 20% of customers?
  • Do you segment, choose and target future prospects based on Customer Lifetime Value?