As a business owner, you may have seen the term “customer lifetime value,” but not known what it meant. If your search for an answer brought you here, you’re in the right place! As it happens, customer lifetime value is perhaps the most important number that every business must know. Knowing this number not only changes your perspective on customers, but has a positive impact on how you interact with first-time customers.
What is Customer Lifetime Value?
Essentially, customer lifetime value is what a customer is worth to your business—not just in the money they spend, but across your relationship with them as a whole. For example, how reliable are they as customers? Even if they’re not big spenders, do you see them often? Do they tell their friends and relatives about your business and bring in new customers? Do they know people who can bring you more important business opportunities? The value of a customer can go far beyond what they spend in a day, and with that in mind, it’s critical to nurture relationships of value.
How Does This Look in a Practical Sense?
Business models can vary widely, so when it comes to calculating customer lifetime value, the formulas can get complicated very quickly. With that in mind, however, let’s use a basic example. Let’s say you’re the owner of a hardware store. One of your regular customers is a contractor who visits once a month and spends a minimum of $200 each visit. In those moments, he’s worth $200 to you, but over the course of a year, he’s worth $2,400! And if he’s been a long-time customer of yours, let’s say, for fifteen years, that means his customer lifetime value is $36,000!
My book, 90-Day Profit Reset: Gain Your Independence from Reduced Cash Flow, Evaporating Customers, and Shrinking Margins, contains a worksheet for helping you calculate customer lifetime value. If you want to get into the mathematical side of things, you can find the book here. It includes different options depending on your type of business, whether it be service, retail, or something else entirely. You can buy it in Kindle form or get a physical copy to take notes.
How do I Make the Most of Customer Lifetime Value?
It’s commonly known that keeping existing customers is considerably cheaper than acquiring new ones. Essentially, the money lies in building a relationship with existing customers in any way you can. For loyal customers, you should be dedicating more time to them, seeing what else you can offer them to get more out of your relationship with them.
It’s here that practices like upselling and cross-selling become critical. Normally, it’s hard to upsell and cross-sell new customers, but with existing customers with whom you’ve built trust, it’s considerably easier to get that extra revenue from going the extra mile.
Building a Relationship
One of the best bits of advice I can give you about upselling is to not sell. Even if you’re taking it easy, most customers will be turned off if they feel like you’re trying to squeeze more money out of them. Reaching that next step takes time, patience, and trust. You can build trust by offering certain perks to loyal customers. This can include discounts, free consultations, and most importantly of all, problem solving.
Get to know your customers a little bit—don’t just treat them like walking piles of money. Like everyone else, customers have problems that they want to solve, and if they’re coming to your business, they want to solve that problem. As an example, I’ll tell you a story that demonstrates not only how to do this effectively, but also how to stand out among your competition.
A client came to me looking to straighten out his finances. He told me that he was paying his CPA a certain amount for very specific services, but not much else, and as a result, he wasn’t seeing a great return on investment. I gave him a more realistic estimate of what he had to do, outlining a plan in detail to help this client save money. Almost immediately afterwards, he hired me to be his CPA.
The important factor here is that I wasn’t trying to sell this client on his services—rather, he was solving his problem. The sad thing is that the other CPA didn’t have to lose that client. The other CPA simply treated that client as a customer and nothing else. Had they put in the effort to solve that client’s problem instead of just taking orders, they would have developed a solid relationship, and that client’s customer lifetime value would have increased dramatically. Since I know this, I took the opportunity the moment I saw it. As a result, I not only helped someone out with a problem, but in doing so, I earned a new client, increased my income, and gave my reputation a boost. Most importantly, I did it by not trying to sell a product. I gave them a solution instead, and this is a strategy that has worked for him countless times.
In essence, customer lifetime value is massively important to your business, and hopefully this explanation gives you some perspective on how to make the most of it. Nurturing strong, loyal relationships could be exponentially more profitable than spending time and effort bringing in as many new customers as possible. It’s one thing to be good at selling, but it’s another thing entirely to keep your clients, and if you can do both, you’re virtually guaranteed to be successful.
Some of my best clients have been with me for over 30 years, and he knows it’s relationships like these that launch businesses to new heights. By solving problems for them instead of blindly selling, my best clients consider me almost “free” because I save them more money than it costs to hire me, and these relationships are mutually beneficial in a huge way.
Remember that your customers are worth more than how much they spend in one day. Spend time with them, work to solve their problems, and build trusting relationships with them to get the most out of your business. With this in mind, go out there, and make the most of customer lifetime value—you have the tools you need to succeed. As I always say: “Let’s make this our most profitable year ever!”