Who are your most valuable customers? This is the question a business must ask in order to determine the customer lifetime value. The goal of a business should be simple: to find these valuable customers and retain them by constantly winning them over again and again. It’s cheaper than finding new customers and you build brand loyalty at the same time. The one problem with this is that assumptions must generally be made about that customer’s habits so that a full picture of their needs can be obtained. Here are the key pros and cons of customer lifetime value to consider before applying this tool.
What Are the Pros of Customer Lifetime Value?
1. It forces a business to rely on multiple marketing approaches instead of just one.
When one method of marketing has generally be successful, it is easy for a business to stick with that approach until they drive it into the ground, bury it, and then dig it up and use it again after it has died. Customer lifetime value forces a business to consider social, viral, and conventional marketing practices to draw in the most valuable customers.
2. It provides a chance to plan for scalability.
If a business knows that their best customers are going to spend $X and that there are #Y customers who purchase on a daily basis, then there is a chance to plan for scalability. Surprises are nice in the business world when they are profitable, but if you need to instantly scale from 5,000 to 500,000 orders, that’s a surprise that might not put a smile on the face. Customer lifetime value lets a business plan this out more effectively.
3. It naturally divides a targeted demographic into meaningful segments.
Customer segmentation naturally occurs when applying customer lifetime value. This actually benefits every segment because it allows a business to identify what specific needs each segment requires. In doing so, there’s a chance to improve the value proposition to each group so that every segment can experience an increase in growth.
4. It places the emphasis of success squarely on the customer.
The ego can quickly get in the way of doing business today. How many times have you seen businesses talk about how many awards they’ve won, how much money they make, and other accomplishments that they’ve achieved? The customer lifetime value switches the dynamic by forcing the business to examine the accomplishments of their customers instead.
What Are the Cons of Customer Lifetime Value?
1. It is easy for a company to put on blinders to focus on just one core group of customers.
Finding your best customers and then cloning them or winning them back for repeat business is important. It’s also important to give attention to the other customer segments who might not be your best, but still contribute a fair amount to your bottom line. If only one core segment receives attention, it’s entirely possible for a company to lose money instead of make it.
2. The future is difficult to predict.
In 2006, people were buying homes on sub-prime loans. Most people didn’t expect the market to drop out 18 months later. Suddenly what looked like a great investment for the future became an underwater monstrosity. Even when using a tool like customer lifetime value, it is important to remember that this is just a tool. It’s a way to think about the future and make plans – just not permanent ones.
3. It takes the passion out of what you’re doing.
Customer lifetime value is essentially a marketing component that needs to be ground out for it to be successful. Experiencing the daily grind on a repetitive basis will eventually lead to burn out for even the best of people. The danger here is that someone can lose their passion for what they’re doing, driving their best customers away because the value proposition has been reduced.
4. It’s not factual.
You’ve got to guess at what your best customers are doing when they’re not interacting with you. Even if you ask questions, you won’t get a complete picture. That means you’re banking the future of your business on what is at best an educated guess. Not everyone business, quite obviously, is willing to do this.
The pros and cons of customer lifetime value show that this tool can be beneficial, but only if it isn’t considered an absolute. Not every customer dollar is going to have the same value. If the pros and cons can be appropriately balanced, however, this tool can help to position a business to be stronger against their competition in the future.