It might sound ridiculous and downright obvious, BUT do you actually know who your most valuable customers are?
In my experience most business owners and managers make the mistake of thinking they know who their best customers are and therefore know their ideal target market, however more often than not, when we crunch the numbers their assumptions are wrong.
To figure out who your best customers are you need to calculate the Customer Lifetime Value (CLV) for each type of customer you have.
By understanding your CLV, you get a greater understanding of how much the relationship with your customers is worth in the long run. Determining these numbers allows you to adopt a better outlook for the future and create a far superior strategic plan.
Knowing your best customers helps to;
Grow your business the easy way
When you know who your best customers are you can start targeting more people like them. These people will spend more, stay with you longer and refer more people to you. Obviously, all these factors will accelerate your businesses growth rate without a proportionate increase in work for you.
Target the right market
Since you will know who you’re looking for, you’ll be able to find them more efficiently, speak to their specific needs more persuasively and nurture them successfully through the buyer journey. The benefit of targeting the exact right market straight off the bat, is that you’ll save a lot of marketing and advertising dollars and not accidentally fill your database with useless leads who either won’t spend much with you or worse won’t purchase anything from your down the line.
Foster a strong relationship with better customer experiences
By understating your perfect customer you are then able to connect to your customers on their terms, give them an exceptional customer experience, improve customer satisfaction, which is paramount for retention and increasing the value of your customers to your business.
This all sounds amazing, doesn’t it! So, how do with calculate this amazing CLV?
First and foremost you’ll need to answer for the following questions.
- How often does each customer buy from you?
- How much do they spend in each transaction?
- How well does your business retain customers?
- How long will they be your customer?
Next you need to divide your customers into relevant segments.
To truly identify and understand who your best customer group is you’ll need to divide all your existing customers into segments based on relevant differences, then calculate the CLV of each segment. By doing this you will see how each segment group performs against one another and then focus your efforts accordingly.
Let’s look at different segments you can use to identify your best customers.
Demographically
This is the first go to for most people, looking at customer demographics such as; age, gender, occupation, job title, income, location, education level, marital status, number/age of children and life stage.
Purchasing Habits
In addition to demographic information you will most likely have a lot of behavioural data that you can use to identify profitable customer segments. For instance looking at your sales records you should be able to determine specific customer purchasing frequency, purchase amounts and preferred services and/or products.
Referrer Information
If you are tracking referrer information for new customers (i.e by asking them “How did you hear about us?”) you can investigate the differences between customers who came from different referral sources.
Referral customers are definitely worth investigating, this is a quick and easy way to uncover a source that your marketing and sales strategies aren’t utilising.
Lead Source
Similar to referrer information, understanding what channels your customers are coming from can save you money that is being wasted on unsuccessful channels and highlight opportunities of channels being underutilised. For example, tracked lead source could be Social Media ads, Google search, event attendees. Essentially, the channel where your relationship with a customer or lead first began.
CALCULATING YOUR CLV VARIABLES
The following is a quick reference on how you can start to calculate the CLV of your above segments.
Average Order Value
The first number you need to know is your average order value per segment. It’s important to note that one customer could buy several times in a period and each of those purchases would be considered an order when calculating average order value.
Remember CLV is not based on average order value alone. It’s just one piece of the puzzle.
| Total Sales for Last Year |
| $ |
| / Total Orders for Last Year |
| = Average Order Value |
Average Number Of Repeat Sales:
The next number you need to identify is the average number of repeat sales determined over a set period of time. It must be the same time period you used to calculate the Average Order Value.
| Total Orders |
| / Total Individual Customers |
| = Average Number of Repeat Sales |
Customer Retention Rate:
The length of time someone remains a customer is the customer lifecycle. To calculate this figure you need to know the number of customers at the end of the period (E), the number of new customers attracted during that period (N), and the number of customers at the start of the period (S).
(Number of customers at the end of the retention period – number of customers attracted during the retention period) / number of clients at the start of the retention period x 100 = Customer Retention Rate
| [( | E | – | N | ) / | S | ] x 100 = | CRR |
Customer Lifecycle
This is the average length of time a customer across a particular segment will continue doing business with you. In order to calculate this figure you need to know the customer retention rate for each segment.
1 / (1- Client Retention Rate) = Customer Lifetime
| 1/ (1- | CRR | ) = | CL |
PUTTING IT ALL TOGETHER
Once you have all the above figures for a segment, it’s time to put it all together to quantify that segments lifetime value.
Average Order Value
x Average Number of Repeat Sales
x Customer Lifecycle
= TOTAL AVERAGE CUSTOMER LIFETIME VALUE
This final number represents the customer lifetime value of one segment. By comparing this number among multiple segments, you can understand which customer segments are truly valuable to your business and which ones are not.
Once you have this number, there are a few additional costs and profits you’ll want to factor in per customer to understand the hard costs and profits of each segment group.
If you wish to fully decipher and understand your businesses CLV, feel free to contact us at jacqui@stellarmarketing.com.au