How Billion-Dollar Companies Think Differently About Customer Relationships Every business needs repeat buyers. Look for patterns to help you increase the lifetime value of each customer.
By Daniel Marlin Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Everyone knows great products, solid branding and a thriving corporate culture help a company achieve massive growth. But sometimes the secret to scaling is as simple as being able to pay more than your competitors to acquire new customers.
Unfortunately, spending marketing money to attract new customers can be expensive. And it's downright dangerous if you don't have a plan to develop a profitable relationship with them. Instead of a scattershot approach, try changing the way you think about your customer relationships. Reframe the picture from one-time transactions to ongoing interactions so you can design and optimize processes that generate more sales, uncover hidden profits and facilitate massive organizational growth.
Billion-dollar companies already put these strategies to work in their relationship-building. Here's how you can learn from their model to scale your business even faster.
What is customer lifetime value (CLTV)?
Would you spend $100 to market someone a $50 product? If you consider only the surface question, it might appear as if you're losing money. That's because most business owners don't view an initial sale as the beginning of a potentially long and fruitful customer relationship. They haven't considered the repeat business they could get from each customer and how that will contribute to future revenue.
You can use the concept of customer lifetime value (CLTV) to estimate the financial value each of your customers brings to your business.
Related: 4 Steps to Building Lifetime Value From Expensive First-Time Customers
What does CLTV look like in real life?
Big companies leverage CLTV to get the most out of their customer relationships. Beachbody, a well-known multinational corporation, offers a textbook case. The business uses a variety of marketing channels to sell a range of workout videos and nutritional programs. Some of these new-customer acquisition tactics (infomercials, multilevel marketing, ecommerce, etc.) can get very expense. Yet many of Beachbody's customers make a relatively low first payment -- sometimes less than $20.
The thing is, Beachbody has dozens of products that would appeal to very similar groups of people. If a person buys one product, he or she is extremely likely to buy more in the future. Even better for Beachbody, each product requires several monthly payments.
What starts as a straightforward $20 purchase soon becomes multiple purchases and multiple payments. Customers no longer represent a single purchase but a source of recurring revenue that feeds into the business for months on end. Therefore, the revenue a customer generates in the long run far outweighs the initial cost spent to acquire his or her business.
How do you calculate CLTV?
If you're like me, math equations give you headaches. Sure, you could use any one of several, complicated formulas to work out a CLTV figure. Let's keep it simple and apply one that focuses on only three variables:
- Annual profit contribution, or how much a customer generates for your business each year;
- Average customer lifespan, or how long someone remains your customer; and
- Acquisition cost, or how much you spend to get a person's first-time business.
Considering these factors, you get an equation that looks like this: CLTV = (Annual Profit Contribution x Average Customer Lifespan) – Acquisition Cost.
In essence, CLTV is determined by how much profit you make from each customer during the entire time he or she remains with your company (once you factor in all marketing costs spent to acquire him or her).
Related: 7 Steps to Winning New Customers
How can you improve the value of your customer relationships?
The equation's language makes it clear you must do specific things to maximize each customer's CLTV. To make the relationship more profitable, you need to sell more products on an individual-buyer basis. You have to treat customers well so they'll stick around longer. And you must make certain the cost to acquire each customer isn't higher than it needs to be.
Babak Azad, Beachbody's former Senior Vice President of Customer Acquisitions, offers a few tips for increasing the CLTV of your customers -- just as he did.
Get more money from the same people.
How? Simple. Sell each person additional products or more expensive versions of products he or she is about to purchase. Many people assume that upselling requires you create opportunities for customers to purchase related products or services. This is comparable to upgrading the size of your fast-food meal or adding an extra side of fries.
Azad suggests there's an easier way. "Incentivize your customers to buy more than one of whatever product you're selling," he says. "If you're offering a training program, why not offer a discount that encourages people to buy a second one for a friend?"
It's easier and more affordable to sell someone more of the same stuff than it is to generate an entirely new sale. Add upsells to your product range, and you're sure to be rewarded with easy profits.
Related: 2 Biggest Hurdles to Winning the Referral and Retention Race
Keep a customer forever.
Getting a new customer is easy compared to the task of ensuring she or he sticks around. You won't generate long-term revenue if you can't retain your customers, and you can't retain your customers if you don't keep them happy.
Many people think only subscription-based companies need to worry about retaining customers, but that simply isn't true.
"All companies should view retention as making sure customers are happy enough with you that they buy new products when they come on offer," Azad says. "After all, happy customers ultimately represent repeat business and referrals."
There are a few reasons customers might be leaving you.
- You don't have a specific person focusing on customer satisfaction, so no one's accountable when customers go elsewhere.
- You aren't measuring how long customers remain loyal to your company, so you've no way to gauge how new-business strategies are affecting customer retention.
- You don't collect customer feedback to identify customer concerns, so you've no idea which problems to address to keep them satisfied and extend the relationship.
Related: 10 Simple Ways to Improve Customer Retention Rates
Get new customers without going broke.
There are dozens of ways to acquire new customers, but that doesn't mean you should use all of them at once. Some marketing channels are easier to scale than others. They'll help attract more customers without your having to do more work or spend more money per customer acquired as your business grows.
Each channel requires specific skills, technology infrastructure and sufficient time to use effectively. No channel is inherently more cost-effective than another if you don't know how to use it properly. To identify which channel is best for you, narrow your focus or you'll spread yourself too thin. Azad recommends choosing one or two channels with good potential to scale -- and concentrating your efforts exclusively on them.
Related: Trouble Scaling? Examine How You Approach Digital Transformation.
Azad also suggests you bring back one old-school approach: Add a phone number to your website's sales pages. Some people still aren't comfortable making large purchases online. An uncomplicated test can help you determine whether some of those customers are visiting your site. Get a prepaid mobile number for your business and put it on your landing pages and checkout pages. Then, log the number of calls you get on the new phone every day, week or month.
You'll quickly be able to determine whether the call volume warrants setting up a small call center. If the numbers are sufficient, you'll have an easy way to acquire new customers who otherwise would have left your website (and probably never come back).
Related: Why Customer Experience Is Your Key to Success.
Business is competitive. Customers come and go. But the secret to creating a company that lasts lies in getting the most out of relationships you've already developed. Stop trying to make a quick buck, and start developing relationships that will sustain you long into the future. Focus on using CLTV to create more value for your organization, and you'll be rewarded for your strategic thinking.
