Recognise the Lifetime Value of Your Customer (LVC)
By Mandy Collett
In the last edition of The Networker, I talked about Customer
customer Loyalty loyalty and the importance of building a "Back-end" for
your business.
To recap: "Front-end" simply means the first sale that you
make to your customer. the first product or service that they purchase
from you. "Back-end", on the other hand, refers to all products offered
for sale to the customer after the first - in other words "repeat business".
Many companies spend a large percent-age of their marketing
dollars and efforts on attracting new customers, only to abandon them
after the first sale. They fail to remember that 80% of your sales come
from 20% of your current customers, and that it is 10 times easier (and
more cost-effective!) to sell to someone who has bought from you before!
Fundamental to the concept of Back-end is the Lifetime Value
of Your Customer (LVC). Essentially, this refers to the value of any one
customer, over the course of their relationship with you.
Consider this example:
XYZ Incorporated conducts a marketing campaign that attracts
100 new customers at an average revenue of $100. The resulting revenue
from the campaign on the Front-end is $10,000.
Now consider that 20% of the new customers purchased the
following month from XYZ Incorporated, at an average revenue of $50. That
represents an additional $1,000 Back-end revenue from the same campaign.
Consider again if those same 20% of customers spent $50
a month with XYZ Incorporated over the next two years. The resulting LVC
is $1,000 a month or $24,000.
On the Front-end, the revenue derived from the campaign
is $10,000, however when you include the Back-end over a two year period,
the revenue from the campaign is $34,000 (that''s 250% more!)
Although this is a fairly simple concept, LVC has many repercussions
on your marketing strategy. Many companies set their marketing budgets
without regard for this vital statistic and while it is prudent to be
conservative and contain marketing costs, it is also essential to consider
how much you can spend in order to bring in a customer that has an LVC
far in excess of their Front-end value.
When analysing the effectiveness of any campaign, it is
essential to consider the LVC, as it can not only help you formulate a
more appropriate marketing budget, it can also help you tailor your marketing
strategies to suit the purchasing behaviour of your clients.
To further illustrate this point, let''s assume that the
above mentioned marketing campaign cost XYZ Incorporated $500. That would
mean that based upon the Front-end revenue, the marketing costs per new
customer are $5 ($500/100) and the yield is 20 ($20 revenue per $1 spent).
When you take into account the LVC - the yield increases dramatically
to 68.
What this means, is that in cases where the LVC is substantially
greater than the Front-end revenue, the marketing budget can be increased
and more resources allocated to the promotion, in order to bring in the
new customer.
In order to determine the Lifetime Value of Your Customers,
you need to conduct research into the buying behaviour of your client
base. Try to segment your customers into separate categories and determine
how often each segment purchases from you and how much they spend each
time.
Once you have determined the respec-tive LVC, you may more
effectively target their buying behaviour. This will also give you a new
perspective on how much you can spend to bring those customers in.
Mandy Collett is a Marketing Consultant. She can be contacted
on 0411 191 274.
