Do You Know the Lifetime Value of Your Customer?

I read a surprising statistic recently. It said that four in 10 senior executives in large companies don’t know the lifetime value of their customers. According to MarketingCharts, Forbes and Sitecore conducted a study of 312 senior executives in North American companies and learned that not only did they not know the financial value of their customers, more than half had no plans to find out. Basically, they don’t understand the significance of this important number—or they don’t care.

There is so much wrong with this. If these leaders don’t know their customers’ value, how can they expect their employees to understand it? Employees need to know the lifetime value of the customer in order to make proper customer-focused decisions.

To understand this better, let’s look at a simple example. Everyone goes to the grocery store to buy food and other staples, and studies show that the average customer spends $80-200 at the grocery store each week. Let’s just say an average customer will spend $100 a week. Even if you eliminate a couple of weeks per year, assuming that the customer is away or on vacation, that still leaves 50 weeks, which multiplied by $100 is $5,000 each year. But we’re looking at an even bigger picture: the lifetime value.

Another statistic figures into this, which is that the average family moves about every seven years. So, assuming that with each move they shop at a new grocery store, one family is worth about $35,000 over the course of seven years. How does it help to know all this? Imagine that a customer complains about a carton of spoiled milk. Knowing that their true worth is $35,000, would you hesitate in refunding their money for the milk? Of course not!

Here are some steps to understanding and applying a customer’s lifetime value:

1. Calculate: Determine the lifetime value of the customer. A simplified formula would be as follows: (How much the average customer spends per transaction) x (The number of transactions per year) x (How many years they do business with you).
2. Communicate: Share this information with employees so they can make better decisions.
3. Demonstrate: Give specific examples of the kinds of decisions they can make such as refunds, exchanges, upgrades and more.
4. Recognize: Show your approval and appreciation when employees make good decisions.
5. Teach: Conversely, if an employee makes a bad decision, kindly instruct the employee about the right course of action and coach him or her about how to handle the situation the next time.
6. Share: Tell the story. Share good and bad examples of decision-making based on the lifetime value of the customer. Look at it as part of your employees’ ongoing training.

In short, knowing the value of a customer makes sense. If you manage interactions with your customers while keeping their lifetime value in mind, you will make the most of each and every interaction.