Customer Lifetime Value (CLV)- Entrepreneurs, you can generate more revenue if you use a customer focused approach.

By Judith Mugeni

In varsity I wrote a paper.  The purpose of the study was to evaluate the advantageousness of customer lifetime value (CLV) as a metric for customer selection and marketing resource allocation for a small businesses operating in South Africa.

Customer Lifetime value is defined by (Bick, 2011) as the “present value of all current and future profits generated from a customer over the association with the firm (p. 650). The net profit or loss to the firm from a customer over the entire life of transactions of that customer with the firm (Berger and Nasr, 1998).

Anyone who does business and has repeat business (clients that they provide a service to or have a potential of providing a service to over and over again) can calcluate CLV (it is not a big business only phenomenon).

My argument is as follows, if you as a small business can stop and think when servicing a customer of all the potential money you could make from them, in their lifetime, you would not provide bad service to them. I say small businesses because when we have casual chats, we complain about the service we received from that “person you were trying to empower by not going to a bigger company” and how we regret giving that person the business. Whereas with the bigger business, “you know that you have recourse, you can call the CEO, the CFO, the receptionist, anyone to complain and they will be there to fix the problem.”

To illustrate, when a plumber (or any other service provider) is called by a customer/client to their house/office/business, he gets there, he fixes the problem, in some cases he offers a 3 month warranty on his work (if you are a great business that focuses on customer satisfaction). Less than a week, the same problem reappears. The customer calls and the plumber is out of reach. While the plumber has made his R1000 off this customer and is happy with that, this plumber has lost potential revenue for the next years to come from the same customer. Had his service been great the first time, when a need arises from the same customer (another block somewhere), he would have been called again, and again and again. Thus had the plumber just stopped to look around the house/office, forecast the potential problems that could arise from the same customer and thus the potential incremental revenue, he would have returned the customer’s call. Our problem, we don’t think that far. This customer by the way also has friends with a deep pocket and similar problems, he/she would have recommended you for your great service and all over suddenly, another opportunity to make more money again, and again and again. But alas, we don’t stop to think like that. We finish a job and move on. Stop, take down the customer’s detail, make notes about the transaction, when you solved the customer’s problem, how much the customer paid, how the customer paid. Now add a future date of when you think the customer might need this service again, how much would you charge the customer for the second service? Great, contact the customer before this date and see if all is well.

The promotion of the small, medium and micro enterprise sector (SMMEs) has been a key focus for many countries and the South African government has  through its communication identified SMMEs as a medium imperative for providing solutions to the challenges of unemployment and poverty in the country (Rootman & Kruger, 2010). According to research, in developed countries, it was estimated in 2011 that small businesses contributed approximately 50% of the GDP while small businesses in South Africa only contributed around 30% of the GDP, however, providing around 80% of the employment opportunities (Swart, 2011)

However, It has also been argued that only one in ten newly established firms survive for longer than ten years in the business environment (Mahadea & Pillay, 2008:437 as cited in Rootman & Kruger, 2010). A 2010 study conducted by FinmarkTrust’s Finscope, South Africa Small Business Survey found that 39% of small business owners cited money-related matters as the main obstacles they faced when starting up their businesses, while 34% cite business strategy issues as their main obstacles (Swart, 2011). Other hurdles faced by small businesses, which lead to firm failures, include the lack of access to financing, lack of financial and managerial skills, lack of expertise as well as economic factors such as poor sales and weak growth prospects (Rootman & Kruger, 2010).

The rise of customer equity management has been attributed to the understanding that “no two customers are the same, even when they are in receipt of an identical product. Profitability varies greatly among customers because of service” (Chang, Chang, & Li, 2012, p. 1058)

So to skip the academic jargon, let us tick off the basic boxes (the next article will go into more detail):

  • In this day and age, you as a business have access to your client’s data. Whether you get it from when they call you to do the job or when they engage further with you on your social media or on your web page or over email. The point? Collect the customer’s information. This is your database (start, even if you have 2 customers).
  • After you have a database of your customers,
    • fill in all the information you can get, who they are (profile them, gender, location, age, education, income etc),
    • you should track their purchasing/usage of your product (as simple as an excel spreadsheet detailing, what they bought, when they bought it, where they bought it and how they bought it (cash, PO/credit/on account/retainer etc)
    • Now think about the effort that you have gone to, to get this customer (did you advertise your services somewhere and how much did it cost, did you have to pay a receptionist to take calls, did you have to pay rent for your office space, how much airtime did you spend to call them back etc)
    • Look at how much you have charged vs the effort to get the customer, was it worth it? If yes, great. Is this a customer you really don’t want to provide great service to?
    • Look at how much you have charged vs the effort to get the customer, was it worth it? If no, either offer them another service where you increase your price or better yet Fire them! (more on that in our next article)

The ultimate goal of calculating profitability is to “develop highly committed customers who not only make repeat purchases and generate continual revenue streams, but also require minimal maintenance along the way” (Ofek, 2002, p. 1).

 

If you are a small business and need help calculating which of your customer’s are profitable and which ones you must fire, contact me at judith@ganizaniconsulting.com

 

 

 

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