Return of an Old Friend: Customer Lifetime Value in B2B
One way or another, everything comes back to the numbers, but sometimes we look right past the numbers that matter most. With so much of marketing’s focus on winning new customers, it’s easy to forget a simple financial truth. Companies grow faster and more profitably if they retain more of the customers they already have and do their best to pursue cross-selling and upselling opportunities within them. So why don’t B2B marketers spend more time focused on doing exactly that?
Let’s start by finding out if you really know what customers are worth. While most recognize the common sense of focusing on customers, that’s not enough in most companies to drive a shift in marketing investment. Actual proof is required. A simple way to clearly show why focusing on keeping and building the customers you have is good for growth is customer lifetime value (LTV). It’s not a new tool, but it works.
LTV predicts the worth of a current or potential customer (or group of customers) over the course of the relationship with a seller. Consumer marketers use LTV to understand whether the cost of acquiring and retaining a certain customer is justified – and when profitability will be maximized during the customer lifetime. For example, think of mobile carriers that offer a free phone because they’ve calculated that their initial expense will be more than covered over the life of the long-term service contract that went with it.
LTV works a bit differently in B2B, but provides a similar foundation to predict business value over time. Marketing and sales organizations must have a specific understanding of the different shares of value delivered by customers, and the cost of losing more of them than they should. Start by defining the lifetime value of current revenue. Current revenue is what the customer spends today balanced by how long they’re likely to stay a customer at that current spend level. Ideally, you would also factor in likely growth, or potential value. This means not just what they spend with you today, but the potential for that customer to spend more in the future. This is not an exact science, but an ideal-case estimate based on what you sell and what that type of company could buy. There are other factors to consider when doing more complex models, but the only goal here is to bring attention to the cost of losses, so we’re keeping things artificially simple. When you create this model, you have an individual and an overall estimate of current customer value.
Next, take a look at current retention rates. Start with the highest-value customers. Based on past experience, what percentage of that business are you likely to lose this year? Now, look back at the outcome of the current revenue LTV estimate. Based on this attrition, how much new business will you need to bring in to cover those losses and still make your growth goals?
Here’s where the fun part comes in. Now that you know what losses cost you each year, estimate what it would be worth if you were able to keep just 1 percent more of that existing business? How about 5 percent more? What would keeping a small percentage more of existing business mean to top-line growth? Chances are it’s enough to make you think about shifting some of your new customer acquisition budget to customer retention support. I promise it will be money well spent.