According to the USDA, the average cost of raising one child to adulthood is about $284,000, not including the cost of college. Housing, food, childcare and education, transportation, healthcare, clothing, and that "other" category are all areas of expenses mom and/or dad must consider when raising children to their road of independence. In other words, kids aren't cheap. But, what good parent is counting? Who can put a price tag on what our sons and daughters bring to our world?
Parents may not be stacking up the cost, but you know who should be pulling out calculators to gain more clarity on the value of their relationships? Every single organization. Understanding the worth of your customers is critical and crucial to your business. Before we dive in, let's take a quick step back and ensure we realize our audience's importance.
Customers Are Valuable Assets
Music award shows are the best example of a brand taking stock of the vitality of its audience. It never fails. The winner of a category leaps to the stage, receives their prize, and graciously presents their acceptance speech. Most winners always thank their adoring fans, and some go as far as to mention how much they understand they only exist because of them. Artists possess an expansive view of just how much their audience makes or breaks them.
Bringing us back to where we left off, we sure hope you do too? At THuS Marketing, we realize without hesitation, there would be no THuS without you. You, our clients, our fans, and our audience bring THuS life, and for that, we are humbled and aware that our relationship with you holds worth.
It is the job of any business to have a full-scope awareness of the value of your customers.
This concept of just how much our audience is worth isn't just an emotional acknowledgment. An actual number, a data point sheds light on this question. We call this the customer lifetime value (CLV), which is, in essence, the total worth of a customer to a business over the whole period of their relationship. More plainly said, dropping the textbook definition, CLV is how much money a customer will bring your brand throughout their entire time of being your customer.
It's an essential metric as it costs less to keep existing customers than it does to acquire new ones. It provides an indicator of business progress. Your goal is to know your CLV and increase your existing customers' value to drive growth. As with any artist, you're creating a fanbase who will continue to purchase from you time and time again, decreasing the enormous amount of time, energy, and spend dedicated to acquisition.
Calculating Your CLV
Knowing the diverging impacts of acquisition versus retention is good business. Acquiring new customers creates a foundational audience base, while retention builds customer relationships and maximizes revenue so you can continue to invest in both. But how much time and resources you should devote to each is determined by your CLV. It gives you insight into whether or not you can expect particular customers to become repeat customers. Have a high customer lifetime value? You have fans of your brand who will continue to spend more with you. Have a low CLV? Then you have passive customers who made a one-time purchase, and it will take tremendous effort to re-engage.
Ready to calculate your CLV? Like a parent identifying and adding up all the expenses spent to raise a child to adulthood, you have to begin to determine all the activities implemented to gain a customer, increase repeat business, and increase each existing customer's profitability. Your basic formula would be as follows:
X = Revenue Earned from a Customer (Annual Revenue x Average Customer Lifespan) - Customer Acquisition Cost (CAC)
You can't determine your CLV without knowing your CAC. It sounds like an alphabet soup. We know, hang in there. Your CAC is the money you invest in attracting a new customer. Consider what you spend on advertising, marketing, PR, and so forth. You have to take into account what it costs to convert your prospect to understand their ultimate value.
There is another factor that you must pull into the equation. That is the cost to serve. What expense comes with conducting business? From overhead to logistics, this involves everything you do to get your product or service into your customer's hands and ensures it does what it's intended to do for them. Keep in mind, the cost to serve your customer could look different across audience groups. Consider categorizing your customers to know how best to target your engagement with your fans.
Knowing your CLV allows you to understand what's driving customer spend and motivating their loyalty. Additionally, you gain a clear picture of the value your audience delivers back to your organization's bottom line.
Speaking of the bottom line—here's ours. As your audience sticks with you, they add and bring increased value to your fan base. Your CLV helps capture the importance returning and remaining customers provide.
You worked hard to secure your customer, ensure that their value doesn't get lost, and only increases over the length of your LONG standing relationship!