Customer Lifetime Value (CLV) is an important business metric. It is the total revenue your business earns from a customer over time. It gives you a picture of the business’s short-term, and long-term status and financial viability. It is also an indicator of product-market fit, client loyalty, and recurring revenue from existing customers. You can’t continue to improve if you don’t measure.

Know what your customers will spend over time

CLV gives you an understanding of the costs and profits of your business as it relates to acquiring, generating revenues, and retaining customers. Also, getting repeat orders from existing customers brings in a healthy cash flow regularly into the business. When you know what a customer will spend with your business over time, you can consider more options for your acquisition budget. 

Two basic ways to calculate CLV

There are two basic ways of calculating CLV, depending on what data you have available.

1 Accumulated data

If you have historical sales data, this method is far more accurate. It puts together all orders by individual customers to get their own real CLVs. 

2 Average estimate

If you don’t have granular data, you can estimate an average by the following formula: Average order value times number of orders per year.

How to calculate Customer Lifetime Value

For instance, if your customer base will, on average, buy ten times per year at $10 per transaction (or $100 per year) for ten years, the lifetime value of a customer is $1,000 (minus costs). If your profit is 25% of sales, the CLV is $250 (25% of $1,000). Therefore, you could technically afford to spend $250 to attract a single new customer. However, many marketers suggest that you do not spend more than 33% of CLV or, in this example, would be $82.50.

Another view. If you could improve each of the three CLV numbers by 10%, you would increase profits by 33 percent, giving you a profit of about $332 (plus $82). This additional profit could then be added to your marketing budget to grow even faster the following year.

 Now, how can you improve each element of your Customer’s Lifetime Value? 

Now that you know the lifetime value, you want to spend some serious time examining how you can improve your revenues and profits. This information will also give you a long-term look at your business and help you plan for the future. To improve your results, you should do the following things sequentially: 

1. Increase the dollar amount of each sale to a customer. 
2. Increase the frequency that customers purchasing from you. , 
3. Try to increase the number of products or services you provide for your customers.
4. It gives you a customer feedback loop so you can improve customer service
5. Build customer loyalty
6. Analyze and improve customer pricing
7. Better target your customer through segmentation
8. It helps you plan both short-term and long-term strategy
9. Then, you can begin to increase your market share by going outside — to increase your market share by working on your competitor’s customers.

This process also forces you to look at different market and customer segments. For example:

1. Who are your best customers and worst customers using CLV? How can you get more of the good customers and maybe fewer of the lower-value customers? 
2. Which products provide the most revenue and profits? Can you add value to your products and increase the price?  
3. Which industry or market segments provide the most or least CLV? Are you in the best markets, best niches and aiming for the best clients?

You also want to generate many alternative ways to increase your Customer Lifetime Value. 

Now, you can focus on developing many alternative ideas and practices to increase your CLV. You want to focus on your overall business strategy, potential innovations, and marketing strategy. More information is available on our ClickVisor program to help you accomplish these crucial tasks.  

Consider Multiple Marketing Approaches

This process also requires you to expand your marketing approaches based on the industries, segments, and types of customers. It is also a good idea to have more than one marketing approach that you continue to use long term. You need to try and test different approaches as the world and people change. 

 Customer Lifetime Value will change as you create and implement new programs.

As you implement your marketing program, this lifetime value should change as the variables in the process change. So, reviewing your CLV regularly make sense. It will cause you to rethink many things you’re doing as you always look for ways to improve that number. 

Conclusion 

Client Lifetime Value is an essential concept for every business. It goes hand in hand with customer repeat orders and retention. It is also a great concept to broaden your thinking about your company and its mission. Plus, businesses with a high CLV can service their client better and grow continuously over time.

We’ve all been there—several people discussing the problem that needs to be solved to meet the goal. But the challenge is that different people have different definitions of the “real” problem. This short blog post, taken from Michael MIchalko’s book, Thinkertoys, will help you end that uncertainty. It will help you identify and prioritize problems and convert them into specific challenges using creative thinking. I have condensed this to keep it as short as possible for this blog post.

Start with a list of problems.

Start by making a list of the problems that need to be solved. Following are a few examples. How can I increase revenues by 20% this year? How can I cut costs and increase production? How can we better differentiate our product from our competitors? How can we improve the role of the service department?

Just the act of writing your challenges down may result in some immediate ideas.

Carefully craft your challenge statement.

The more time you devote to perfecting the wording of your challenge, the closer you will be to a solution. So the next time you have a problem, write a challenge statement out, study it for a while, then leave it, change it, stretch and squeeze it, and restate it. Questions help you look at a challenge from different perspectives. Following is the blueprint for executing this statement challenge.

Blueprint

Broaden your view.

 1. Write your statement as a definitive question, beginning with “In what ways might I (statement)…?”

2. Vary the wording of your challenge by substituting different synonyms for keywords

to broaden your perspective of the problem (e.g., increase to multiply to enlarge)

Then, squeeze your view down to a very narrow, specific perspective.

1. Divide your challenge into sub-problems

2. Solve the sub-problems

3. Then, Keep asking how else? And why else?

Again, positively phrase these problems and as a question: “In what ways might I…?”

This form helps keep you from concluding what the problem is too quickly.

You want many different perceptions of the situation to see other possibilities.

Stretch the challenge

To keep your mind open to all possibilities, stretch your challenge by asking “why?“ several times. Also, asking why will help you identify your general objective and challenge your assumptions. This process will also help you redefine and reshape your challenges.

For example, suppose your challenge is “in what ways might I sell more computers?“

1. Why do you want to sell more computers? Because we need more funds to pay bills.

2. Why do you want to increase revenues? Because costs are growing.

3. Why do you want to sell more computers? Because sales are beginning to slow down.

4. Why do you want to sell more computers? To make investments in new products.

5. Why do you want to increase your sales volume? To take advantage of discounts.

Expanding your challenge gives you a broader concept of the challenge so that you can view many more approaches.

Squeeze the challenge

Once you have a broad idea of what you are trying to find, narrow the objective from the general to the specific by squeezing it. This process makes your challenge easier to solve. To squeeze a challenge, you want to discover its strengths, weaknesses, and boundaries. To do that, ask who, what, where, when, why, and how.

1. Who might have unique strengths and resources or access to helpful information

2. What helps identify all the things, objects, and items involved in the situation,

the requirements, difficulties, rewards, and advantages and

disadvantages of formulating a resolution?

3. Where considers the place? Locations or focal points of the problem.

4. When probes schedules, dates, and timeliness of the situation.

5. Why helps you reach an understanding of your primary objective?

6. How helps you recognize how the situation developed, actions that may

have been tempted or now occurring, and steps that one could take?

You’re going to do that for the larger problem and the sub-problem.

Conclusion

Going through this exercise will enable you to see all of the things you need to do to solve the problem.

Now, you can prioritize them and accomplish them one by one until you can reach your goal.

You may also have to redo your analysis as you go because things will change.

Try to go through this discovery process. The first time makes you think. But you will be surprised at the results you get.

Reverse risk is a technique you should test. It will make your product or service more desirable than your competitor’s.

Most companies hedge their “guarantee.” They don’t want to assume the risk. They are afraid the customer will want their money back. Yet, a solid guarantee is the easiest, most immediate way to a cash flow bonanza. 

Your “iron clad” guarantee tells your customers that you’re willing to stand by what you say. It means your customer that you are confident that your product or service’s quality will meet their expectations — but you need to make sure it does.

Suppose a customer returns the product, rather than being disgruntled, graciously and readily give them their money back. In that case, The customer will gain confidence that your word is good, making it more likely they will purchase a product from you again because it’s easy to return what they don’t want, and you will be pleasant about it.

Also, it allows you to upsell your customers. It is also a prime opportunity to find out about the product or service they didn’t like and will enable you to offer them a product or service that will better serve their needs. You can also turn a bad situation into a good one.

Here is another way to look at risk reversal

The longer the guarantee is, the less likely it is that a customer will return the product.

If the product has a 1-day trial period, you’d better believe that during those 10 days, the customer will be hypersensitive to the product or service and its performance. They want to make sure they don’t get caught post the deadline, so they scrutinize and evaluate it before the 10 days are up.

Suppose the industry norm is 50 days; set your offer apart by offering a 60-day guarantee. Chances are, the customer is going to decide whether he’ll keep your product during the first week or two. Very few would determine that maybe the product isn’t for them on the 51st day.

This risk reversal idea will work for all types of businesses. If you are skeptical, test it out and see for yourself. If you can’t do it for legal reasons, you may be able to find a different way to execute this risk reversal idea.

How can you reverse the customer’s risk when he is thinking about buying your product? This would be a great question to work on using the random word technique in the strategy module.

All companies are subject to external trends that affect their business over time. Think of the rapid rise of the cloud or the global movement toward protecting the environment. Looking at these trends with the proper perspective can show you how to create Blue Ocean opportunities.

Most companies adopt incrementally and somewhat passively as events unfold. Managers need to focus on projecting the trend itself, whether it’s the emergence of new technology or significant regulatory changes. They ask in which direction the technology will evolve, how it will be adopted, and whether it will become scalable—the pace of their activities to keep up with the trends they’re tracking.

The key insights in the Blue Ocean strategy arise from business insights into how the direction will change customer value and impact its business model. Looking across time, from the value delivered today to the value it might provide tomorrow, managers can shape their future and lay claim to a new Blue Ocean.

Looking across time is perhaps more complex than the previous approach. It’s impossible to predict the future, but it can be a disciplined approach. Our objective is to find insights into trends that are observable today.  

Three Trends

You must access three trends over time to find a Blue Ocean strategy. These three trends must be decisive for your business, irreversible, and have a clear direction. You can also watch more than one trend at a time—for example, a technology disruption, the rise of a new lifestyle, or a change in regulatory or social environments. But usually, only one or two will impact your business.  

Once you have identified an important trend, look across time and ask what the market would look like if the trend continued to its conclusion. Then, you can identify what must be changed today to unlock a new Blue Ocean by working back from that vision.   

An Example

For example, Apple observed the flood of illegal music file-sharing in the late 90s, such as Napster, which had built a global internet base by downloading more than 2 billion music files every month. While the recording industry fought to stop the cannibalization of physical CDs, illegal digital music downloading continued to grow.

With the technology out there to digitally download music free instead of paying $19 on average per CD, the trend toward digital music was evident. Also, the fast-growing demand for MP3 players that played mobile digital music, such as Apple’s iPod, underscored this trend. Apple capitalized on this solid trend with a clear track trajectory by launching the iTunes online music store in 2003. 

iTunes buyers were free to browse 200,000 songs, listen to 30-second samples, and download an individual song for $.99 or an entire album for $99.99. Because people could buy at a reasonable price, iTunes solved a key consumer problem: having to buy an entire CD when they only wanted one or two songs on the CD.

The process is about discovering, not predicting, or preempting industry trends. It is also not a trial-and-error process of implementing wild new business ideas that happen to come across managers’ minds or intuitions. Instead, managers are engaged in a structured method of re-ordering market realities in a fundamentally new way.  

Some Questions

What current trends are highly likely to impact your industry, are irreversible, and have a clear trajectory?

How could these trends impact your industry?

Based on this trajectory, could you increase customer value?

Competition tends to converge not only on the scope of their products and services but also on their appeal. Some industries compete primarily on price and function based on calculations of utility. Other industries compete essentially on feelings or emotion. 

 In the past, companies have unconsciously educated consumers on what to expect. A company’s behavior affects buyers’ expectations in a reinforcing cycle.

These traits change over time and become more entrenched. It is no wonder market research rarely reveals new insights into what attracts customers. Industries have trained consumers on what to expect and what they hope is more of the same for less.

Companies willing to challenge their industry’s functional and emotional orientation can often find new market space.

Industries that are emotionally oriented offer many extras that add price without enhancing functionality. Stripping away these extras may create a fundamentally simpler, lower-priced, lower-cost business model customers would welcome.

Conversely, functionality-oriented industries-infuse commodity products with a new life by adding a dose of emotion and, in doing so, can stimulate new demand.

Some Examples

For example, Swatch watch transformed the functionally driven budget watch industry into an emotionally driven fashion statement. Or Body Shop, which did the reverse, transformed an emotionally driven cosmetics industry into a functional, no-nonsense cosmetics house.

Comex, a large cement producer, created a Blue Ocean by shifting the orientations of its industry from functional to emotional. Instead of selling cement, they got people together who each put money into a pot. 

Then each week, there was a winner. At the end of 10 weeks, there would be enough winnings to buy cement to build a particular room in their house. It was very successful because they were selling a dream with a business model involving innovative financing and construction know-how.

Pfizer shifted its focus from medical treatment to a love lifestyle enhancement. Starbucks turned the coffee industry and its head by shifting its focus from commodity coffee sales to the emotional atmosphere where customers could enjoy their coffee.

Relationship businesses –such as insurance, banking, and investing — have relied heavily on the emotional bond between broker and client. They are ripe for change. 

Direct Line Group, a UK insurance company, has eliminated its traditional brokers. They felt they could do that because customers would not need the hand-holding and emotional comfort if they could pay claims quickly and eliminate any complicated paperwork.

So instead of using brokers and regional branch offices, Direct Lines uses information technology to improve claims handling and passes on some of the cost savings to customers in the form of lower insurance premiums.

The vanguard group (an index fund) from Charles Schwab (brokerage services) did the same thing in the investment industry, creating a Blue ocean by transforming emotionally oriented businesses based on personal relationships into high-performance, low-cost, functional businesses.

Questions

Does your industry compete on functionality or emotional appeal?

If you complete with an emotional appeal, what elements can you strip out to make it functional?

If you compete on functionality, what features can be added to make it emotional?