Which would be more valuable to you? A customer who comes into your store and purchases $150 worth of merchandise then never comes back? Or a customer who comes into your store and buys only $50 worth of merchandise, but then comes back and purchases another $50 worth of product a few weeks later, then another $50 worth a few weeks after that, then keeps purchasing from you over time?
As a marketer, you invest a significant amount of time in your print and multichannel campaigns. It’s important to understand what works. With traditional models of evaluating success, emphasis is placed on immediate results. But is this really the best way?
Take the example above. In the first few weeks after a campaign, Customer #1 seems to be the more valuable one. However, it is Customer #2—the one who keeps coming back—who ultimately spends more money and delivers greater profitability. This is why it is so important to understand 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, gyms and 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 time.
Understanding LCV is important not just for evaluating the success of your marketing campaigns, but also in developing the profiles of the types of customers you want to target moving forward. You want to go after the right customers who will deliver the best results.
Let’s look at some of the questions that can be asked by taking a broader view of Customer #1 and Customer #2.
- Which is ultimately more valuable?
- When doing new customer acquisition, which customer profile do you want to use—Customer #1 or Customer #2?
- When evaluating the effectiveness of timing, frequency, and channel mix, which mix is actually more profitable, the one that resulted in Customer #1 or Customer #2?
- What can be learned from the difference between the two customers?
- Is there a way to convert Customer #1 into Customer #2?
LCV is a critical element of marketing strategy, and you want to get it right. Talk to us about understanding LCV for your customers.