Evaluating your Customers Over their Lifecycle

The customer is a valuable asset to any organization. Every organization tries to incorporate a lot of strategies to gain, and sustain its pool of customers for a longer time span. If a company becomes successful in gaining and retaining customers, it is its biggest achievement. There could be possibly two prime reasons for such an achievement. First, the company has a good standing in the market which is why it could attract ‘prospective customers’. Second, it is consistent in delivering just ‘the best’ and therefore its customers are happy to come back time and again. This further means with the same customers the company can hope to generate predictable profits.

Now that we know if customers keep coming back to the same company the prospects of the company’s growth become higher. Let us understand clearly how. When we talk about life long association of the customers, we also mean to indicate a few other important elements allied like “Lifetime Value of customers” or “LTV”.

What is Lifecycle Value of customers?
Customer Lifecycle Value is all about the future. It is based on the customer’s retention with the same company primarily, and then the rate with which a customer spends. If any company is sure of its reliable customers, then by applying a strategic estimate it can analyze roughly how much revenue those customers can generate in the nearing future. This estimated value is the ‘Lifetime Value’ of customers. Interesting?

The simple formula to calculate the customer lifetime value is by multiplying the average sales by the average number of times they will come back. 

Customer Lifecycle Value is the value of expected cash flow from the customer in the future.

Not only this, but there are also some additional benefits attached to it. Let us presume a company named ‘Xylon’ starts its business and progressively starts to get a good customer response. If it has more capital to invest, it is probable that it would try to expand its business. With analysis of past performance, suppose now Xylon expand in a different geography to earn more customers. Now here, Lifetime Value of customers comes into play. Not only does Xylon intend to attract new customers, but also needs profits to keep flowing in because of existing customers to fund future expansion.

Importance of Lifecycle Value of customers
Since Lifecycle Value of customers can be adopted by the companies to look at the investments they make to acquire customers (like sales and promotion, customer service, customer retention, etc.), and also the fruitful returns they get from them, it often gives them satisfaction of long-term customer relationships.

In a business, though one can never be certain of profits and losses, but by following a strategic plan we can become cautious. It is always preferred to chalk-out a rough plan of action to determine its marketing strategies. This is required in order to fetch more business, that too with negligible wastage of funds. After all, acquiring new customers and retaining old ones is not an easy task!

It will be a positive forward-looking strategy for any company to keep a watch on what it spends in adding new customers, and what it gains from the existing ones. Besides this, if a company continues to create a positive experience and take care of its loyal customers it will be benefited doubly –
  1. The company will encourage word-of-mouth marketing through each of its satisfied loyal customers, who will share their positive reviews with their friends using social networks and always-connected devices. 
  2. Earning profits from the existing customers will be cost effective because the company will only be required to fulfill their usual demands which will be similar to those in the past. This will be less challenging and far more cost-effective than trying to get business from new customers.
Companies often tend to scrutinize the behavior and needs of the customers and try to base their sales and marketing plans on them. They often see their customers with the value of purchases they make. For an instance, if a customer buys a product worth USD 1,000 the company sees the customer as being worth USD 1,000. If the same customer purchases another product of the company worth USD 500, company sees the customer as being worth USD 1,500 (adding his previous purchase). But the right way to see a customer is not only with his present purchase records, but also with the purchases they are likely to make in the future. This is known as the Customer Lifetime Value (CLV).

Studying such records about the customers is important as it gives important clues to the company to determine their future along. From the ongoing business relationship that a company has with its existing customers, the future prospects of the company can be calculated easily. Customer Lifecycle Value is used by the company to calculate cumulative profit and loss data of the company with the existing chain of customers in the future, this is also known as Customer Lifetime Value (LTV). Since for a company it is all about satisfying the present customers and spreading across through them, CLV is of utmost importance. The key to keep your customers contented is to show them ‘you care’, keep them engaged with you, and ask them for their valuable feedback.

It is important for any organization to put into practice the calculation of Lifetime Value of customers. Once a company becomes sure of its approach to attract new customers with pocket-friendly measures, it will simultaneously become more confident about its profits. An effective CRM solution and data mining a good estimate of CLV can be calculated. This can help in execution of strategies for gaining competitive advantage.

Based on the customer lifecycle value, customers should be segmented and serviced. Business persons should be smart move makers opting for measures which are result oriented. If they perceive that by only spending more on ostentatious marketing methodologies more new leads will be generated, then they should think again! Lifetime Value of customers is an effective tool, which is valuable for determining the future of businesses.