One way to segment your customers is by their lifetime value. Compared to many other measurable customer attributes, lifetime value is the kind of big-picture description that can be difficult to observe or estimate at a glance. But it’s also one of the most valuable pieces of information you can have about your customers.
Customer lifetime value is a prediction of how profitable your relationship with a given customer will be over time. Lifetime value can be calculated a number of different ways, from simple formulas to complex equations. Some of the factors that go into this calculation include how long you expect the customer to stay a customer; how much money that customer tends to spend with you, and how often; what it costs to keep that customer loyal; and the average rate of churn throughout your customer base.
Essentially, a lifetime value measurement boils down your relationship with a customer to a dollar amount. But the benefit of is not just quantitative: it influences businesses to prioritize the long-term maintenance of customer loyalty, compared to more expensive efforts like customer acquisition.
Using Customer Lifetime Value for Segmentation
Once you’ve predicted the lifetime value of each customer, you can then group them into tiers, from most to least valuable. The most valuable customers are those who shop with you frequently, generate the most profit, and are most likely to stay. The least valuable customers may be new or casual shoppers who split their attention and money between you and your competitors. In the middle are the rest: regular, if not devoted, customers who don’t have the most to offer you, but don’t cost you much to keep, either. These are customers who could possibly be influenced toward more value if tended correctly – and if not, may slip down to the bottom tier.
For the highest third, the ones you can’t ask much more of, the goal is to make sure they stay. For the middle third, you can try to grow their value by appealing to them with additional services or products, or offering loyalty rewards, like discounts.
But what about the lowest tier – the one that experiences the most churn? Do they have anything to offer? Would you be better off without them?
Don’t Write Off Your Low-Value Customers
Once you’ve singled out your most valuable customers, it’s only natural to want to gravitate in their direction – to reward their loyalty with perks, to provide them the best service, and to otherwise do everything in your power to keep them around and keep them spending. All this effort is still less costly than investing the time, energy, and budget to convert lower-value customers up the ladder.
All of that would seem to justify prioritizing your top tier. But do so at your own peril. Every customer’s “lifetime” with your business has to start somewhere, and many of them start in that lowest tier. It’s rare to simply acquire a high-value customer out of the gate: they must be nurtured, and this tier is where that relationship-building has the most impact.
Converting an existing low-value customer into a higher-value one is still less expensive than acquiring a new one, with unknown value. Despite the investment they demand, it’s easier to see a customer move up the value ladder, while the ones at the top are not terribly at risk of slipping back down (unless you really mess up). Besides, if you don’t devote attention to the least committed customers, chances are that your competitors would be more than happy to take them off your hands.
The easiest way to make your low-value customers into VIPs is to treat them like VIPs.
No matter how many invisible dollar signs hang over their heads, every interaction with your business and brand should make them feel valued and respected. They can also be a valuable source of insights and intelligence. Don’t be afraid to ask them directly: What would make you shop here more? How can we best serve you? Voice of the Customer research is your friend, especially among this group. What applies to some can likely be used to woo others.
Of course, some customers will just never be converted and end up taking up more resources than they’ll ever be worth to you. Customer divestment was once practically an anomaly, but these days, some companies see it as a smarter move than keeping low-value customers on the books. (Read more: The Right Way to Manage Unprofitable Customers on HBR.org – though we at CSP don’t necessarily stand behind that headline.)
Bottom line: Give each customer the attentive and inviting customer experience they deserve, and watch the overall value of your customer relationships grow.