What is Customer Lifetime Value in Marketing?

Customer Lifetime Value (CLV) is total worth of a customer to the business over the entire lifecycle (full duration of the relationship) of the customer with the company. Putting it a little differently, Customer lifetime value (CLV) is the total value (revenue) a customer contributes to your business over his/her lifetime – which starts with a new customer’s first purchase or and ends with the last purchase i.e. moment of churn.

CLV is one of the key stats in marketing and helps businesses budget/allocate funds for customer acquisition and retention programs. For example, a customer spends Rs 20,000 per year and average life of all the customers in your business is 5 years, the CLV here would be Rs 100,000 minus the money you spent in acquiring the customer. Say, you spent Rs 10,000 in acquiring a customer. Your CLV in this case would be Rs 90,000.

If I put this in form of a formula, it will be:

CLV = average value of a purchase X number of times the customer buys each year X average length of the customer loyalty (in years)

OR

Annual revenue per year x number of years the customers stays with you – the customer acquisition cost.

If your net margin is 25% of the sales price, it would be Rs 25,000 minus the customer acquisition cost (which is Rs 10,000 in this case) i.e. you make Rs 15000 from each customer from the entire life-cycle of the customer.

Customer Acquisition Cost (CAC) is a very important parameter in sales & marketing and we should always look for a healthy ratio of CLV:CAC. If the CLV is less the CAC must be capped but if the CLV is high you can afford to spend more in CAC.

CLV can be historic or predictive depending on the data used to calculate:

Historic CLV is sum total of the revenue from all the past purchases in a specific period. Say one year or more. This method uses past transaction data for the calculation.

Predictive CLV is the total projected revenue a customer will generate for your business over the time period he/she is going to stay as a customer. This uses past transaction data and buying behavior of the customer.  

Now there are two ways of increasing the CLV here:

  A)   Increase the number of customers for which you will have to spend money in customer acquisition. Customer acquisition in the above case is Rs 10,000. However this can backfire in case your Customer Acquisition Cost (CAC) is more than the Customer Lifetime Value.

  B)   Increase the average duration for which the customer stays with you i.e. increase the Lifetime. The duration in the above case is 5 years, if you can take this to 6 years your revenue from the same customer becomes Rs 120,000. i.e. the CLV goes up from Rs 90,000 to Rs 110,000.

When you know your customer lifetime value you can improve it. Of course, only working on retention may not be the best strategy instead the successful businesses balance their focus on new customer acquisition and old customer retention both. Calculating CLV will be easier if your business model runs on membership or subscription model as compared to customer’s need based approach. In subscription you can lock the customer with you but in random purchase like we buy from a mall shop or an ecommerce website it will highly vary.

In all the surveys and research it has been established as fact that the new customer acquisition cost is always higher than retaining an old one. Hence it’s imperative that we get to know about some tactics to retain our customers for longer time with us. But it all starts with knowing CLV. In fact, knowing CLV in your Business can help you in many ways, including the below:

            a) Reduce customer acquisition cost by investing adequate budgets on right sales & marketing activities.

          b) Improve customer retention by walking all the needed extra miles to please your customers.  

       c) Encourage existing customers to spend more on your products

       d)   Knowing your most important customers who help you make more money. This can also help you in knowing your least preferred customers and you can even decide to fire a few. Yes, it sound bizarre but it makes complete sense when your service cost to some customers is way higher than the amount you make from him/her through all purchases.  

Here are 6 easy ways to increase the CLV:

    1)   Stay in touch with the customer through emails, SMSes & calls. Keep them reminding that you exist and offer a variety of services. Your goal here is to be on top of the mind of your customer so that whenever she or her contact sphere needs anything you sell – they must contact you.

    2)   Be grateful and show it. Gratitude goes a long way. Send thank you emails just after the customer buys something from you. Be specific and let the customer know you appreciate the patronage. Did I tell you that people love free gifts. Offer something physical or at least a coupon code for their next purchase.

   3)   Build new products that complement the existing products. Say you sell shoes, how about selling socks, shoe polish and polish brush as well and letting the customers know about these. And always upsell e.g. in Domino’s, the man on the cash counter always asks for a cold drinks and cup cake with the pizza and not only he/she asks to if you would like to order some cold drink or cup cake but they also tell you about the offers available on buying those extra things and most of the time end up selling more.  

   4)   Offer a loyalty program to all the customers i.e. give incentives/discounts on repeat purchases.

   

   5)   Fire the bottom customers with whom you make the least profits, say bottom 10 to 20% customers and try to acquire only high CLV clients. If the CLV is high you can afford personalized attention to all the customers thus improving retention i.e. longevity of the customer.

    6)   Reduce the Customer Acquisition Cost: Remember a penny saved is a penny earned. CLV is total revenue from the customer minus the Customer Acquisition Cost. If the CAC reduces, CLV will increase. And yes, reducing CAC is possible provided you use some smart marketing and sales ways.

4 Easy & Inexpensive Ways for Startup Branding

Startups – Bootstrapped or Funded! Nearly none has enough funds they need to grow to the level of entrepreneurs' dreams. The branding activities may come last in the train of tasks to be done. I know what you are thinking! Yes, this article is written for you.

Brand building or a bit of (read it as massive if your dreams are big) marketing is must for any kind of start up. No matter how awesome the product or service is – it will not reach to enough number of people and the sales numbers will be poor which ultimately impacts your top and bottom lines both.

In a Nielsen Survey 59% of the customers prefer to buy new product from a brand familiar to them. In a start up you can’t really compete against big brands with huge marketing budgets.

Oh yes, brand building is expensive & tough – that is the reason there is just one Nike or one McDonald’s or Pepsi & Coca-Cola just two drinks, Toastmasters – just one platform in the world if you want to be a better public speaker, BNI – just one networking organization if you are looking for a support group of entrepreneurs. How many LED Bulb brands can you recall – maybe 2 or 3. Oh you know a lot - maximum five LED Bulb brands! Let me say – there are many thousands of them out there. And we can’t really recall about them because they never invested in brand building. You may not have a dream of being world’s biggest brand in your field. But you must cut across the clutter and start doing a bit of branding to increase the probability of getting in front of the eyes of prospective buyer or influencer.

But when paying the bills is struggle who can afford to spend so much on branding? Well, the mantra is:

• Start wherever you are
• Do whatever you can
• But start now & don’t stop

If you are there with a long term vision, don’t ignore marketing. Here is a list of 12 things which you can do to make your product or service known in the world around you at literally no or very low cost:

  1)   Get on social media platforms like Facebook, LinkedIn or YouTube and start posting. Let the world (no matter how small is your world there) know that you exist and kicking. It’s FREE. You don’t need to hire a marketing agency for this. Just get started yourself or seek help from someone in your friends, family, office or office. The world is there, the internet literally has unlimited potential.

  

  2)   Attend networking events. Maybe you can join some associations, forums or visit few as a guest. Trust me, the best and biggest of the business deals are made through interactions with people. Go to trade exhibitions and meet with people. First you will have to be visible in the world before you ask for a sale. For startups – this one is the best advice and gets highest ROI if you are looking for some good clients and to serve with a long term relationship mindset.  

  3)   Use marketing collaterals and logo merchandise. Get a cool looking visiting card, wear your logo printed Tshirt or a head cap, have a name badge with company or product logo, what about diary & pen with your business branding printed or engraved on those. Do you have your company logo printed mugs in your office and at the homes of your customers? Have got a one way vision board for the rear windshield of your car? Outdoor media is super expensive but that space of your own car has always been free and available – utilize it. I know of an entrepreneur – wherever he went for a sales meeting, he left a logo and company name printed ball pen at the main gate of the premises and then another at the reception. People just love getting freebies – use this absolute universal truth. If you are a B2B player or a manufacturer who has large clients, think about giving them desktop gift items. Just imagine – putting your logo printed good quality desktop item on the desk of your client is just like putting hoarding of your business there which the client will not remove for many months – ah this you don’t pay any rent for this hoarding of course. Once we got wall clocks made with our company logo and details on what we do and gave those free in salons. Lots of salon owners asked for their other branches as well and those are still there after 2 years. Just imagine how many customers have viewed these so far! Unimaginable. I can go on and on for this particular point of branding through novelty items.   

  4)   Make a google page, create your company location pin, upload some photos of your product or the factory and yes start asking people to rate and review your product/service. Google reviews can boost the credibility of your business without spending any money. Ah yes, google reviews are super helpful in SEO ranking – but that’s too technical as of now. Even if we discount talking about the impact of google reviews on SEO ranking – these still offer a lot to the businesses. If you are selling on e-commerce websites like Amazon – you must make an attempt to get genuine reviews about your product there. Potential buyers rely on these reviews to make up their mind for any purchase. Yet another and a good benefit of google reviews is – you get FREE customer feedback which you can use in improving your product or service.

Last but not the least, please understand brand building doesn’t happen over-night. It takes years of consistent communication and excellent service to build a brand. But once you get started the universe will help you. If your product or service is good people will spread word of mouth and word of mouse too.

Of course, you would end up spending money, time and energy in doing all this and even more to build your brand. Trust me, this can be awesome investment – you will start getting – more projects, more word of mouth referrals, increased sales and customer loyalty for your products and services.   

Remember, ‘Your brand can be your biggest asset’ in long run.

The Ansoff Matrix - Tool for Growth Strategy

The Ansoff Matrix was developed by H Igor Ansoff and was first published in Harvard Business Review in 1957 with the title, “Strategies for Diversification”. Since then it is one of the key tools used by companies to analyze and plan their strategies for growth. This matrix is also called product – market expansion matrix. When any company wants to grow revenue that can either be done by developing new products for the existing markets or to go to new markets with the existing products. Keeping products and markets on one axis each gives us a 2x2 matrix. By using this tool we can analyze the four available options to grow sales, do the risk assessment of all the four options and then choose one or more.

Here are the initiatives you can go for and adopt the different strategies:

  >> Market Penetration (existing market with existing products): Increase the store opening hours, start free home delivery, reduce order processing time, showcase the entire product portfolio, acquiring a competitor in the same market, offering limited time discounts to attract more sales. This strategy is least risky as this utilizes the existing resources and capabilities and doesn’t require any major capital expenditures.

  >> Market Development (new markets with existing products): Open new stores in new areas, start serving to new and more pin codes with your delivery services, tie up and collaborate with other players in the same field or different field to share the resources. This indeed has relatively more risk than the Market Penetration Strategy. It can be domestic expansion as well international expansion.

  >>Product Development/Enhancement/Upgradation (existing market with new products): Reduce cost, improve quality, modify packaging, launch new version, make combos with other products. This needs considerable effort and investments and is definitely more risky than the earlier two i.e. Market Penetration and Market Development.

  >>Diversification (new market with new products):  Into related products or new products, upstream integration with suppliers or downstream integration with the intermediaries. This strategy is the most risky as going for this means new products and new markets. This choice may become a hit or this can also be a very dangerous step.  

In today’s fast changing business scenario the leaders can’t afford to stick to the business as usual instead it’s imperative for companies to look for new ways to increase sales and grow the top line as well as bottom line in the balance sheet. To do the same Ansoff Matrix analysis at least once in a year and see how can the expansion be embraced?

BCG Matrix is One of the Most Important Marketing Models

When it comes to consulting in corporate world - Boston Consulting Group (BCG) is one of the top companies globally they developed a 2x2 matrix to do the analysis of product portfolio of any company in 1970s which is widely taught in B Schools and used in corporate extensively. This matrix is also called BCG Analysis or Growth – Share Matrix or Product Portfolio Matrix or Boston Box. BCG Matrix has Relative Market Share [Your Firm’s Market Share divided by Your Largest Competitor’s Market Share] on one axis and Growth Rate on the other. By knowing the values of these two parameters for all the products of a company, the organizations can plan their investments at company level.

The matrix has four quadrants named as below:

  1)   Dogs: Products/Services which have small growth rate and small market shares. These are the products which are at the end of the product life cycle, these have tough completion and low margins. These products can also be called ‘me too’ category products. If the resources are limited, ideally these products / services should be removed from the portfolio.

  2)   Cash Cows: Products/Services with low growth rates but high market shares. Most of these products are the ones which have been in the market for some time and are in the maturity stage of the product life cycle. Focus in this quadrant is called milking strategy which is also referred as “milk these products as much as possible without killing the cow”.

  3)   Stars: Products/Services with high growth rate and high market shares. These are generally at the start of the product life cycle and the products in this quadrant generate highest ROI. To have many stars in the company regularly – it’s essential that the company must invest time and money in research and product development. 

  

  4)   Question Marks: Products/Services with high growth markets but low market share. These are also known as problem children. These are the products for which the future is not clear, they have high growth but low market share. The organizations must make the choice of investing resources and try to make them stars or let them become dogs which ultimately may die. These can either move to stars or drop to dogs. The future of the products from this category depends on the direction by the management as well as the potential of the product/service in the market.

Originally this matrix was developed to analyze the product portfolio but can be applied to your machines if you have many in the manufacturing unit or to your customers.

The customers from where you earn good margin and lot of growth the expected become STARS in your customer portfolio.

The customers who give you lot of revenue but low margins and have less scope for growth become your CASH COWS.

The customers who can potentially generate lot of revenue but a very less margin is expected become your QUESTION MARKS.

The customers who take lots of time to serve, we need to spend energy and resources to fulfill their orders but very little is earned and this is not expected to grow as well become your DOGS.

The DOGS category customers can be fired and the saved resources can be utilized in serving the STARS, milking the COWS or perhaps in the process to develop some more STARS in near future.

This is a pretty useful analysis to keep only the performing products or customers and filtering the loss making ones. However the businesses must understand this is a consistent endeavor and not a onetime activity to do and forget.  This must be repeated on regular intervals where the interval can be maximum a year.

What is The Most Unique Selling Proposition of Your Business?

The unique selling proposition or unique selling point is a marketing concept first proposed as a theory to explain a pattern in successful advertising campaigns of the early 1940s. The USP theory states that such campaigns made unique propositions to customers that convinced them to switch brands.

Unique Selling Proposition (USP) tells about the unique benefits of any product or service or even a company which helps not only in acquiring new customers but also motivates consumers to switch from competitor brands.

Products or services without clear differentiation are always at risk of being seen as a commodity and thus lower the price potential.

USP is the reason, most of the times the consumer chooses the brand. Let me give you some examples to clarify:

1)Domino’s Pizza: You get fresh & hot pizza delivered to your door step in 30 minutes or it’s free. Domino’s came up with this USP when either competitors were not delivering at all or they used to take lot of time. Domino’s committed freshness as well as within time delivery. THIRTY MINUTES OR FREE became it’s USP. Please pay attention Café Coffee Day’s “A LOT CAN HAPPEN OVER COFFEE” is mere a slogan but not USP.

2)Southwest Airlines: WE ARE THE LOW COST AIRLINE. Their USP was not business class travel or not the food they provide in the flight. In fact they in a way sent a clear message that don’t expect excellent service in this low cost and then anything they did in service became a wow from the passengers as they originally had not expected anything.

3)Head & Shoulders: Clinically proven to reduce dandruff.

Unless you can pinpoint what makes your business unique in a world of homogeneous competitors, you cannot target your sales efforts successfully. Finding your USP is indeed lots of soul searching but it pays to get clarity here. One easy approach can be to ask your customers on why they should buy from you and not anybody else. Find the real reason and let everyone out there know about this.

If you know your differentiation and don’t communicate the same to the market through all the marketing collateral, it won’t make a difference. So, once you know what differentiates your product or service from the competition, you need to focus on Marketing Communication.

Here are three secrets of identifying and leveraging an awesome USP of your product or service:

1) Focus on what your customers really value. USP is all about what they want and not what you as a business person want to deliver.  

2) Go Beyond Slogan: It’s really great if we can communicate the USP via a slogan but is much more than just a slogan. You should be able to live what you commit.

3) It should be assertive and not offensive. Talk about your product/service and don’t compare.

Successful business is not only about having a unique product or service, it's also about making your product stand out - even in a market filled with similar items.