When analysing sales statistics or determining the success of a brand, market research companies look for robust ways of getting behind the top line numbers. Companies that focus on short-term results can sometimes fail to spot the quiet heroes on their balance sheets. These are customers who spend with them rain or shine. So while the big spending current superstars can be pivotal, after all, short-term gains are important in business, they don’t always give us the full picture of where valuable relationships lie.
In order to get a better picture of the value customers bring to a company, and to improve understanding of customer loyalty, market research companies like Blue Donkey invest in analysing the lifetime value customers represent to their client business.
Why’s LTV of important?
Calculating the lifetime value of a customer (or LTV) is vital for market research companies and the reports they produce because it offers a better idea of how much money the average customer brought to a business over the course of their association. Companies can then decide how much it’s worth investing to ‘win’ that kind of customer their future marketing strategy. This can help to inform marketing campaigns, especially when it comes to high value B2B sales and long service commitments.
Where LTV comes from
According to solutions provider Corporater “The first client to develop this metric was a large chemical company that sold pigments to companies like the big three auto companies, as well as paint companies, and others. They found that while customer satisfaction and loyalty were steadily improving, margins were declining at a faster rate. After some analysis, they discovered that some of their most loyal customers were their worst customers. These customers paid lower prices for the products, made frequent changes to orders, expected lots of perks like sporting event tickets and golf outings, and in general, were a pain to work with”.
Since then LTV has become a standard metric that excites market research companies and clients alike by helping organisation’s point their resources at the right customers.
The formula a business uses to calculate the LTV of their customers will vary depending on their business model and the type of products and services they offer. Often, market research companies use a formula like this: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer). Individual businesses using this measurement need to analyse their customer base in order to create calculations that provide valuable insight into customer spending in their context.
What to do with LTV calculations
One of the most important reasons market research companies calculate LTV is that it offers businesses guidance on how much to invest in sales and marketing. Often, high ticket sales involve a significant investment, so businesses need to be confident that winning these high value clients is worth the money. Looking at the LTV of the average customer can, therefore, guide the marketing budget and help marketers to invest in the areas that bring the biggest results. For example, the cost per lead may be higher using telemarketing than online or social media. However, by bringing in longer relationships, higher value sales, and long commitments, the investment will be worth it over time.
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