How do we know whether a particular B2B sales and marketing activity is worth doing? Some managers will judge based on sales metrics following a campaign, others on how many new clients or customers were added to the pipeline. These barometers are often based on short-term impacts, such as, did the company hit targets following a telemarketing campaign, or which group of customers responded to certain key messaging. While these statistics are important, they don’t always paint an accurate picture of whether something in marketing is worthwhile.
To get a clearer understanding of the value customers bring to a company, and to improve customer loyalty, B2B professionals will need to look at the lifetime value created by customers that choose the business over their competition as a result of a particular B2B sales and marketing activity. The Customer Lifetime Value (LTV) metric is usually defined as the revenue that a business will generate from each particular customer over the length of their relationship with the company, considering the cost of acquisition and retaining that customer.
Why is it important to calculate the LTV of a customer?
Calculating the lifetime value of a customer (or LTV) gives us some unique insights about the average value generated for the business by a certain customer over the course of time. Not only does this create a picture of what satisfies certain customers, it also helps with decisions about how much it’s worth investing to ‘win’ and manage customer relationships. This can help inform marketing campaigns in relation to target segments, choice and cost of channel, and customer profiling, especially when it comes to high-value sales, and long service commitments.
The formula to calculate the LTV of a customer will vary depending on the business and the products and services they offer. Often, marketers use a formula like this:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).
According to growth experts Business.com the LTV metric can also be split into actual and potential to illustrate possible growth dynamics of a relationship. As it is about predicting future earnings, it belongs to predictive analytics that forecasts the future value of any particular customer relationship. By definition, LTV can’t be a constant, hard number, and different businesses are likely to adopt different variables for its calculation. Hence companies need to analyse their own customer base in order to create calculations that provide insights about their customer spending patterns.
What to do with LTV calculations
A good reason for calculating LTV is that it offers marketers guidance about where and how much to invest in different areas of their B2B marketing. Often, high ticket sales involve a significant investment, so a company will need to be confident that winning key clients is worth the investment required. Analysing LTV allows marketers to more carefully guide budgets and helps them invest in the areas that bring the biggest results. For example, the cost per lead may be higher using a certain type of high-quality marketing. However, if it brings in several high-ticket sales and long service commitments, the investment will be well worth it over time.
Improving LTV for B2B marketing
There are a number of ways to improve the LTV of the average customer. Targeting companies that are similar in type or size to their biggest customers will certainly help. Alternatively, marketers can increase customer spend using devices like volume agreements or customised offerings, or they can simply work to secure larger numbers of high-value B2B customers by doing more to penetrate their markets systematically. All of these techniques require excellent customer service and communication as well as a comprehensive marketing strategy.
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