Before we talk about the how, we should probably ask why should your Customers' Lifetime Value (LTV) matters to you or your sales team?
It is one of those 'big picture' metrics that keeps your Finance Director up at night but can often be forgotten by Sales. If your sales team is focused solely on hitting their current quotas, they're probably not looking at LTV and could be missing out on critical future opportunities.
The LTV is the estimated revenue that one of those sales will bring to your balance sheet during the entire span of their relationship with your company.
Is the Lifetime Value of a Customer important to YOUR sales team?
How long does it take you to turn an enquiry into a sale? Hours? Days? Weeks? Months? There is nothing as emotionally stimulating as the joy of the close and the realisation that you just smashed your quota.
But how do you feel about all that effort when that customer is just a one-hit wonder who never returns to buy from you again?
Ah, the frustration of churn! Customer Services don't do their job and then it's down to Sales to pick up the shortfall on that month's revenue before the FD notices. The team needs to try to replace any clients who no longer like and trust you enough to buy from you again. It can be like being a hamster on a wheel.
But look at it this way. Your FD recognises that the money is in the ongoing relationship and your sales team should too!
For several reasons:
When you can identify which types of customers have the greatest long term value, it is possible to actively target prospects who are most like them.
When you continue to build your relationship with your existing customers by helping them to:
- understand other ways that they could use your product;
- the best times to upgrade or extend what they have purchased;
- recommend you easily to their friends/contacts/colleagues;
they are much more likely to love you enough to buy from you again.
Increased word of mouth referrals
More importantly, they are much more likely to recommend you to their friends and colleagues - your nurturing activities can help to amplify the power of word of mouth and referral marketing because you are always top of mind.
Now isn't understanding the life time value of a customer a process to put some time and effort into?
How to calculate your Customer Lifetime Value
Precisely how it’s calculated depends upon your company’s business.
Here is a quick back-of-the-envelope formula.
LTV = Average Value of a Sale x Average Number of Repeat Sales x Average Retention Time (Months or Years ) for a Typical Customer
Whatever formula your company uses, LTV provides a good indication of the maximum amount your company should invest in acquiring customers.
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