What is the Difference Between Customer Equity and Customer Lifetime Value?
Unraveling these two pivotal measures will pave the way for more lucrative, long-term business decisions.
Customer equity and Customer Lifetime Value can both give you insights to form smarter strategies, understand your brand’s relationship with your customers, and estimate their return on investment.
There are a number of marketing metrics in use these days that can help turn a good business into a highly successful one. Two of the forward-looking metrics that many accomplished brands use to help their business by measuring both their current and potential performance are customer equity and customer lifetime value (CLV). The two are closely intertwined, but distinctly different. Here’s how to think about, and employ them both.
Determining customer equity is a method that will measure the net profit of all your individual CLVs. Many business operators rely significantly on customer equity to help them make the most important strategic decisions about determining budgets, developing new marketing campaigns, forecasting profits, and estimating their return on investments (ROI), and plenty of other things. Once you understand your customer equity, a new window of insight will open onto your relationship with your customers.
But first things first. While many are anxious to jump right into learning their customer equity, there are a few important steps you must first take, the most important of which is to be able to calculate your own CLV.
Big business or small
Whether you own a small brick and mortar store, an online service business or a large multinational company, you are constantly on the prowl to grow you customer base. But while you are making the effort to increase your quantity of customers, it is essential that you work to keep as many of your existing customers as possible, particularly those loyal buyers who choose you over your competitors time and time again. These repeat customers are as good as gold and can sustain your business into the future. The monetary valuation of those customers is what marketers refer to as Current Lifetime Value (CLV).
Are you currently aware of what your existing clients are worth to you and your business? CLV is a way to understand the value of a given customer over their lifetime relationship with you. You can obtain this metric by conducting a thorough analysis of the behavior of your customers throughout their purchase process. This valuable benchmark can help you to get a better look at all your business activities from a broad, long-term perspective, and goes well beyond simply tracking the initial purchases that your customer makes. By paying attention to CLV, you make yourself better able to choose the future investments necessary to promote and improve your business.
Benefits of CLV
Have you ever wondered why your customers return to buy again? Do you know how often they do return, and how many times? Are you able to tell which customers are more likely to spend more, buy more often, provide referrals or be a greater value to your business? Are there customers with high-buying potential among your small accounts because they only buy from you when your competitors are out of stock? By determining your CLV, you’ll be able to answer these questions and others, and provide yourself with a springboard to future success.
Establishing your CLV comes with many benefits, chief among them being that you can better focus your efforts as to how you then choose to acquire new customers while you continue to tend to your existing customers and maintaining a high retention rate with them. Only by doing both are you likely to grow your business to its maximum potential.
The result of your efforts in determining your CLV will have you thinking about your customers throughout their lifetime with data-focused, well-reasoned decisions about customer acquisition that will in the long run save you time and money and make your business more profitable and efficient.
Identifying customer equity
The creation of your CLV begins with finding your customer equity. As defined by MasterClass, customer equity is “a quantitative measure of the value of a business’s customers in terms of future revenue. This unit of measure helps companies identify how efficiently they can acquire new customers and grow their customer base.”
Customer equity is considered to be an essential data metric to know in order for a business to develop and implement effective and efficient marketing strategies which will in turn, attract more customers and generate more revenues and profits.
The insights that you gain from understanding your customers more completely could allow you, for example, to switch from trying to interrupt people with advertising messages in order to get them to notice you, to instead targeting your marketing dollars to engage with the people who have already shown they have an interest in your business. Your repeat customers, followers on your social media and subscribers to your email lists have already demonstrated interest in your business and are predisposed to be strong candidates to be influenced by your marketing efforts.
A worthwhile effort
There is no metric which will answer all your questions and solve all your needs, and customer equity and CLV are no exceptions to that rule. In fact, it’s important to understand that neither is a static metric that you can ascertain once and for all; it will continue to change over time as you add or remove products or services from your business inventory, or change your marketing tactics.
While CLV is an important piece of information for you to work with, the effort in determining CLV will require a serious investment of you time. If you already have a strong grasp on your customer data, you are ahead of the game. Others may find the effort to pull together all that’s necessary a bit more than they are willing to undertake.
There is another drawback as well. Even with the best data you can muster, the fact is that the future is very difficult to predict with any precision. You won’t really be sure how your customers will react, and you can never foresee the unexpected occurrences that could affect any marketing plan or business model.
However, when used effectively, customer equity and CLV can give you insights to form smarter strategies, understand your brand’s relationship with your customers, and estimate their return on investment (ROI) for marketing initiatives. And understanding both can help you to target your ideal customers, increase revenue, boost customer loyalty and retention, and reduce your overall customer acquisition costs. Having a better grasp on your customer relationships will almost certainly help you with your short- and long-term marketing goals and enable you to make better and more profitable decisions about your business going forward.