These days when B2B business owners ask us for help the first thing we do with them is work out their Customer Lifetime Value (CLV). This can identify, at an early stage, what the return on marketing investment will be. Why is this working for our B2B clients? Well…
- It provides a metric which to base all customer acquisition decisions
- It allows them to measure return on marketing investment
- It helps evaluate sales processes and sales teams ‘real euros’
- It helps focus on increasing the lifetime value of current customers
- It helps identify specific market segments with higher lifetime values
- It highlights the value of customer retention
How does it work?
Its relatively simple really, here’s what you need to know:
- What is your average value of a sale lets call this Average Sale (AS)?
- What is the average number of repeat transactions in months* we’ll call this Repeat Transactions (RT)?
- What is your average gross profit margin or (GP)?
Now we regularly deal with businesses who have huge variances in their customer base, and it is sometimes a struggle for them to come up with these average figures. In that case, we can look at segmenting the CLV, and pick about two or three of them to work with. But in general our preference is to find that average. It is always available if you dig deep enough.
Some companies that do this calculation don’t include the GP figure. We usually recommend that you include GP. It ensures your team has the best information when making customer acquisition and return on investment decisions. Here’s the calculation:
So lets say for manufacturing company Sprockets Ltd. an average customer spends €100 000 per month and Sprockets pride themselves on maintaining customers for 5 years on average. If Sprockets know their average GP is 40% then the calculation is:
100k X (5X12)
CLV = 2.4m
So now we can start making better decisions around new customer acquisition. If a new customer is worth €2.4m what would you invest to get one of these on board? In your case it might be €2400 or even just €240 but I am sure you can see how this clarifies how much investment in terms of cash, time or other resources should be spent on acquiring a new customer.
*this would be 36 if they bought from you monthly and customer lifetime was 3 years.
If you would like to see how Ingenuity could be of benefit to your company click below to contact one of our consultants.