Customer Lifetime Value: How important is it in Lead Generation?

Over the years I’ve rarely heard other marketers, let alone anyone in the C Suite, speak much about Lifetime Value, when talking about their customers.

Generally, I find the reason for this is that most businesses, not just SMEs, have poorly designed or nonexistent customer databases or CRM systems. Basically, they don’t know their customers lifetime value because they don’t have the systems in place to help them calculate their value.

This continues to amaze me as understanding your customer’s lifetime value is probably the most important intelligence you could know about them!

Here’s why.

It’s a fairly simple formula: Customer Lifetime Value is simply calculating the amount of profit a customer provides you over the lifetime of your relationship with them.

CLV = (avg. Profit / purchase X # of annual purchases) X years customer buys from you.

Below is an example that illustrates CLV:

Customer 1
Customer 2
Customer 3
Customer 4
Average Profit per Sale:
$200
$225
$250
$300
Annuals Sales:
1
2
3
4
Annual Profit Value:
$200
$450
$750
$1,200
Years as a customer:
1
1.5
2
2.5
Customer Lifetime Value:
$200
$675
$1,500
$3,000

Understanding your customer’s Lifetime Value is an invaluable tool for you to use to determine the profitability of individual customers. This is immensely important to know, so you can drive your marketing strategies to:

  1. Segment your customers into your most profitable groups.

 Once you’ve identified these customers and segmented them into groups based on what they’ve spent with you over time – find out what common demographic (age, household income and marital status etc.) and psychographic (behavioural, common interests etc.) attributes they share in common.

Also look for clusters of customers that use your products or services in similar way. These then become your target groups, and with a clear understanding of these groups you can better develop your lead generation programs, understanding what you can afford to acquire new customers for each of these groups.

You also be able to calculate your customers average ‘lifetime’, the probability of their making future purchases, and the frequency of these purchases!

Then use this knowledge to help you better select lists and build programs to best target your lead generation campaigns.

  1. Target your lead generation efforts to those prospects that most closely match your customers with the highest CLV segments.

Once you know what attributes to look for in prospects you’ll be able to select the right lists or build lead generation campaigns that match your best customers and know how much you can afford to acquire them.

Remember: It usually takes the same amount of time, energy and money to acquire a low value customer, as it does to acquire a high value customer.

You only have so much time, energy and money. So, target those resources at prospects that most closely match the demographic and psychographic attributes of your highest valued customers for the best chance of achieving the highest ROI!

  1. Know how much you can spend to keep those high value customers.

Here’s a Valuable Tip!

The best leads you can have are those customers you’ve already acquired and nurtured over the years. They know who you are and what value your product is to them, already – they don’t need to be sold, just shown respect and care.

Provided you’ve been servicing them well and are attentive to what they want and need – they will take your call, open your mail and respond to good offers and provide you with referrals! Not to mention the inherent value they mean to your business.

If you’re not too sure about this, just compare the costs of replacing your existing customers with new ones; just consider all the time, energy and money it takes to replace them.

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