In the fiercely competitive landscape of the UK small business market, effective allocation of marketing budgets is crucial for sustainable growth and success. While there are various factors to consider when you are planning marketing budgets, one vital aspect that often gets overlooked is the concept of Lifetime Customer Value (LCV). Understanding the LCV of your clients is essential for making informed decisions about:
- marketing investments
- maximising profitability, and
- building long-term relationships with your target audience.
This article will look at why you need to consider LCV when considering your marketing budget.
Defining Lifetime Customer Value
Lifetime Customer Value refers to the projected revenue generated from a client throughout their entire relationship with a business. Instead of focusing solely on individual transactions the first-year value, LCV is about the total value a client brings over time. Think about your clients’ spend patterns:
- How frequently do they spend with you?
- What is the average value?
- Over how many years do your clients keep spending with you?
By considering these factors, you can make better decisions regarding budgets going forward.
The Importance of Lifetime Customer Value
Long-Term Profitability
Understanding the LCV helps you identify high-value clients and tailor marketing efforts to acquire, retain and nurture more high value clients. By focusing on client retention, you can extend client lifespan, increase purchase frequency, and maximise revenue per client. All of which increase profitability for your business.
Efficient Resource Allocation
Effective marketing budgeting comes from allocating resources where they will have most impact. When you look at where and how to invest your marketing budget, lifetime customer value information will help guide your choices. Here’s an example:
A few years ago, we used Google Adwords (now Google Ads) as a core marketing tool. Starting on just £10 a day, and slowly increasing spend, we spent about £6,000 in the first year, generating first year revenues of about £20,000. Not bad, but not great. We knew that this small business kept its clients and so continued to use this channel. Over a 5-year period, we spent £129,000, but clients generated from this investment spent over £4.2 million, and rising.
Instead of blindly spreading resources across various channels, you can concentrate your efforts on marketing activities that yield the highest returns, improving marketing ROI.
Enhanced Client Acquisition Strategies
Knowing the LCV of your existing clients can guide your marketing. If you could confidently expect a new client to spend £100,000 over the next five years, how much would you spend on acquiring that client? If you based your marketing investment on the first-year spend (call it £20k), you are likely to make different investment decisions.
Prioritising Client Loyalty
A higher LCV often indicates a stronger client relationship and loyalty. Identifying your high LCV clients and investing in account management activities that foster loyalty contributes to your bottom line. These clients also serve as brand advocates, spreading the word for you and generating more sales opportunities.
Strategies to Increase Lifetime Customer Value
Improve Client Experience
The happier your clients are, the more they will spend over time. Providing exceptional service, personalised interactions, and timely support can foster stronger relationships and encourage your clients to remain loyal for an extended period.
Implement Effective Client Retention Programmes
What can you do to keep your clients longer? Depending on your sector, you may consider loyalty programmes, exclusive offers or VIP memberships. These programmes not only increase client satisfaction but also encourage repeat business, further increasing LCV.
Upselling and Cross-selling
Most of your clients can buy more from you. We never see situations where every client has bought every product/service a small business sells. Your current clients already know and trust you, so offering complementary products/services will both increase their LCV and, often, make it harder for them to move away from you. There’s a great article about how to do this here.
Conclusion
Lifetime Customer Value plays a critical role in guiding marketing budget decisions for small businesses in the UK. Making decisions based on individual purchases or first year revenues often mean that you are missing opportunities and not maximising growth.
If you would like to talk more about your marketing performance, call us on 020 8634 5911 or book a meeting here.
