Are you familiar with the concept of Lifetime Customer Value (LCV)? If so, have you thought about it in terms of your own business? Have you ever thought about why LCV would even be important to understand or calculate?
LCV is the value of the customer to your business over the lifetime of that relationship. For example, you might have two different customers: one who places a large order and one who places a small one. Which customer is the most valuable? You might be tempted to say, “The one who placed the biggest order, of course!” But that may or may not be true.
What if the customer who placed the bigger order never orders from you again? But the customer who placed the smaller order continues to place orders with you multiple times per year, year after year? Over the long-term, that actually has a far greater value to your company than the customer who placed the larger order initially. That’s why understanding LCV is so important. The true value of each customer is only seen over time.
Calculating Lifetime Customer Value
Let’s take a look at how to calculate Lifetime Customer Value in the printing industry. It starts by knowing (or estimating) the following numbers:
- Annual Revenue: Calculate the annual average revenue of each customer.
- Longevity: Calculate the number of years this customer will be with your company.
- Referrals: Calculate the number of people who buy print that this customer will refer you to in the future.
- Referral Longevity: Calculate the number of years this referral customer will be with your company.
Here is an example:
Annual Revenue for Customer = $100,000
Longevity = 20 years
20 years x $100,000/year = $2,000,000
Average number of referrals = 2
Longevity = 20 years
20 years x $100,000/year/referral x 2 referrals = $4,000,000
Current Customer Lifetime Revenue = $2,000,000
Referral Customer Lifetime Revenue = $4,000,000
Total Current and Referral Customer Revenue from one current customer = $6,000,00
Wow! Six million dollars in revenue over 20 years as the result of one current customer! This shows the significant revenue impact of taking care of our customers and cementing their loyalty. When we look at customer relationships this way, suddenly the importance of customer retention becomes much clearer!
LCV Helps You See Things Differently
Understanding LCV is not just important for owners and managers. It’s important for everyone member on your team, especially those who interact with customers. Take the time to talk about LCV with your salespeople, your customer service managers, and your front-facing customer service team. In most cases, they may never have looked at customer relationships this way. It will open their eyes to the importance of retaining each customer over a long period of time and investing in that customer to make it happen.
In a future post, we will look at several ways to invest in our customers with LCV in mind. In the meantime, get the ideas churning. How do you calculate and use the lifetime value of a customer in your print business? Then . . . what do you do about it?
