How to increase profits by knowing your numbers: Part 2

In my last column, I covered the importance of knowing your numbers as a way to grow your business and make it more profitable. We explored the closing ratio. This month, we’ll look at two other key performance indicators, customer lifetime value and customer churn rate.

Customer lifetime value, or CLV, is sometimes referred to as LCV or lifetime customer value. It represents the total estimated revenue you can expect from your average customer. For instance, if customers of your accounting firm spend an average of $10,000 a year and they remain with you for an average of eight years, their LCV is $80,000. Some companies break this number down further to net profit. Monitoring CLV helps drive emphasis on long-term customer relationships and satisfaction, rather than just sales. It also assists in financial planning, customer retention, marketing, etc. CLV has been referred to as a “Swiss army knife” of business tools.

All customers are not equal. By that, I mean some are “more equal” based on the amount they spend.

CLV is particularly useful in marketing and sales. A study by found that 81% of marketers increased sales by monitoring CLV. It also protects profitability by helping track the effectiveness of your marketing spend. The better your return on investment for marketing, the better your profit margin.

Acquiring customers is key but keeping them is another matter. We use “churn rate” to monitor customer retention, it’s the percentage of customers lost within a defined time period. The cost of replacing a lost customer is about four to five times greater than retaining an existing one. According to statistics published by author Taylor Landis, improving customer retention by only 5% can boost profit by 25% or more.

Here is your project for this month:

First, conduct an analysis of your customer base to determine your average CLV.

Next, create a “customer by revenue” report. This is a review of all of your customers and rank them by their annual revenue spend. Focus on the top 10% to 20%. This will allow you to identify the ones to whom you should pay special attention and provide additional care.

Lastly, if you don’t already have a formal retention program, create one immediately.

Completing these tasks will help you retain more customers and provide you with deeper insight. We know that businesses that know their customers better are more likely to retain more of them and win in the marketplace.

Download a free “sales audit” that will help you make a comprehensive analysis of the numbers for your organization at G. Deon Bradley is a national business consultant and certified executive leadership coach. He is one of only 10% of certified coaches in North America. For information or a free 90-minute executive strategy session, contact him at [email protected].

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