In the age where brands have taken the spotlight over the core product, it is becoming increasingly important to measure customers’ spend on brands. Companies are also rolling out loyalty offers and various promotional schemes to fight over a customer with their competitors. But this battle can prove to be a costly affair if they end up spending more than what they could ever earn-out of a single customer.
Estimate Marketing Spends
Brands are fighting each other with massive marketing spends to gain the attention of the customers as they have a wide variety of options to choose from. Customers are offered freebies, discounts, promotional offers, coupons, and a host of other benefits to give their brands a try and build loyalty. In the quest to fight for a customer’s share of wallet, companies might end up spending vast sums, which cannot be recovered. Customer lifetime value calculation offers a way for such companies to estimate the revenues generated by a customer over their lifetime so marketing spends can be optimally allocated.
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A general consensus in the marketing world states that it costs a company five times more to acquire a new customer than to retain one. It becomes necessary to calculate customer lifetime value to optimally budget customer retention strategies and programs. For instance, customers leave an internet service provider when he gets a better rate elsewhere. If companies get proactive and are aware of the situation, they can offer the customer a free upgrade to the better package. Calculation of customer lifetime value can give an accurate figure of potential future revenue so they can decide whether a free upgrade could be offered.
Customer lifetime value calculations can also be used to boost revenues with the use of analytical tools. Companies are always faced with decisions such as whether to spend the available resource to capture new customers or roll out offers to retain the current one. Proper use of analytics tools can boost revenues for the company by analyzing the impact of decisions on revenues. Here’s a look at two scenarios where customer lifetime value calculations could be used to boost revenue:
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The company can thus choose to invest in retention programs rather than improving the profitability to boost the total revenue.
To Identify the Right Customer
In most businesses, a small minority of the customer accounts for a major portion of the profits, following the famous 80-20 rule. Companies may still decide to retain customers who yield lower profits for volume sales. In extreme cases, some customers can force businesses to spend a lot of resources with little or no gains in return. By using customer lifetime value calculations, such customers can be identified, and companies can then decide to either fire or de-emphasize them.