A couple of months back I attended a a meeting with a young company in the software sales industry. They were super happy about their rapidly growing client list. “More clients mean more business,” they thought, celebrating each new sign-up as a victory. However, as the months continued to roll on, the initial euphoria faded. It revealed a stark reality—their revenue was not keeping pace with their growing client list.
This revelation (along with our meeting) led them to discover a crucial metric: Customer Lifetime Value (CLV). It turned out that the majority of their clients made minimal initial purchases and did not return for more. This insight shifted their focus from merely increasing customer count to enhancing the value each customer brought over their lifetime. In B2B sales, where repeat business is the norm, understanding and optimizing CLV is not just beneficial; it’s essential for sustainable growth.
Table of Contents
What is customer lifetime value?
Customer Lifetime Value (CLV) is a metric that represents the total revenue a business can reasonably expect from a single customer account throughout the business relationship. The span can vary: it might be several months for recurring software subscriptions or decades for suppliers in industries like manufacturing. CLV is that important because it helps companies understand the economic value each customer brings, allowing them to make informed decisions on acquisition costs and customer retention strategies.
I always encourage our customers to at least try to get a good understanding of that metric. As they do often patterns emerge. It turns out that a particular industry is generating more loyal and more willing-to-spend types of customers than the other. We find out things related to the behavior of certain salespeople. Some of them tend to loyalize their customers while others do not. These findings are oftentimes a great foundation for improvements: in people’s management, process management, or introducing completely new tools.
Factors to consider when calculating customer lifetime value
Calculating CLV can be approached from several angles, depending on the business model and available data. Here are a few common methodologies:
• Historic CLV: This method sums up all the gross profit from past purchases for a customer. It’s straightforward but assumes past behavior predicts future actions.
• Predictive CLV: Using a mix of historical data and predictive analytics, this approach forecasts future transactions based on purchasing patterns. It’s more complex but potentially more accurate.
• Simple CLV: A basic formula might involve multiplying the average purchase value by the number of transactions and the retention period. This method is less precise but offers a quick overview.
Each of these approaches can shed light on different aspects of customer behavior and the value they are likely to bring to your company. You can experiment with a bunch of these to get some predictions for the future.
Monitoring and analyzing customer lifetime value in B2B
Monitoring CLV involves consistent tracking of customer interactions, purchases, and retention. This is typically managed through a Customer Relationship Management (CRM) system. It integrates sales, marketing, and customer service data to provide a comprehensive view of each customer’s value. If you want to know more about CRMs, check out our video.
Analyzing changes in CLV can help identify trends. An example can be: the types of customers that are most profitable or at risk of churn. This analysis can inform targeted marketing strategies, product development decisions, and resource allocation.
Yeah, I know – it sounds complex. But the reality is – If you have a CRM then generate a simple report, add it to your dashboard, and look at it periodically: once a week, once a month, or at least once a quarter.
Utilizing customer lifetime value information
As I mentioned before understanding CLV can transform various business processes:
• Sales strategies: By knowing the potential lifetime value of different customer segments, sales teams can prioritize high-value prospects and tailor their pitches to emphasize long-term benefits.
• Pricing strategies: Companies might adjust their pricing model based on the predicted CLV of different customer groups, potentially offering personalized pricing or discounts to retain high-value clients.
• Customer service: Enhanced service efforts can be directed toward customers with higher CLVs to ensure their continued satisfaction and loyalty.
• Cross-sell / Upsell ideas: Identifying the customers with a lower CLV (or understanding that the metric for the whole business is too low) can be a great opportunity for introducing new products or set of services and proactively selling them to your existing customers.
Conclusion: the strategic value of knowing CLV
In B2B sales, where transactions are not one-off events but parts of longer relationships, CLV is a pivotal metric. Not only does it offer insights into the current health of customer relationships. Furthermore, it provides a forward-looking gauge of business sustainability. Understanding and optimizing CLV allows companies thrive by strategically nurturing the most profitable relationships. In this way, CLV is not just a number—it’s a roadmap for future growth. It is indispensable for any B2B business committed to long-term success. And if you still starving for more knowledge, I encourage you to check out the previous article from this series – about lost reasons.
