Your customers are your most valuable asset. Ultimately, any business is weak without them. But each customer is different, offering a unique level of value to your business. By identifying and nurturing your most valuable customers, you can sell more, increase your profitability and grow your business.
Customer value can be viewed from three distinct perspectives:
• Current value is a measurement of current customer profitability, based on the products and services that customers have previously consumed.
• Lifetime value is an extrapolation of current value, which aims to predict a customer’s future spending based on previous consumption habits.
• Potential value seeks to estimate a customer’s propensity to become significantly more profitable in the future.
It’s important to remember that profitability by definition takes into account the costs you incurred when delivering products and services to customers. You may spend more time or money acquiring and servicing some customers than others, or you might charge higher prices to different customers in exchange for different levels of effort. In other words, customer value is more than just the sum of a customer’s spending. It’s a balance of that sum against the time, effort and money you spent on that customer.
Of course, when measuring the lifetime or potential value of customers, nothing is certain. High value customers may buck the trend, deciding to purchase elsewhere or curb their spending. Conversely, low value customers may become exponentially more profitable. Nevertheless, making sense of customer value - both current and potential - helps focus resources and crucially helps minimise the chance of high value customers going elsewhere.
Tracking spending habits and measuring customer profitability can be difficult tasks, so much so that large organisations with thousands or millions of customers invest heavily in gathering and analysing data in order to group customers by value. But businesses of any size can make use of such approaches. A small company selling products or services to a handful of clients could quite easily find the information they need to analyse customer behaviours. And though perhaps less systematically, could seek to predict a customer’s future spending and profitability. Even companies with more than a few customers can make sense of customer value by employing straightforward data collection and analysis methods to capture and interpret data.
For any business of any size, the focus when assessing customer value should be on collecting the right information and subsequently evaluating it in the right ways. The task may be crude or complex, but either way the process should provide some level of insight into which customers offer most value to your business.
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