How Understanding the Lifetime Value of Your Customer Creates Organic Growth
What is organic growth? It is best defined as the process of business expansion achieved through increased output, sales, or a combination of both. It represents pure growth from within.
Beyond Insurance suggests there are four primary strategies to drive organic growth:
- Market penetration – selling more to existing clients
- Market development – selling to new clients
- Product development – offering new products and services within your market
- Diversification – offering new products and services to prospects and new clients by developing specialization or a niche
Lifetime Value of Your Customer (LVC)
In marketing terms, the lifetime value of a customer represents the net present value of the cash flows attributed to the relationship.
It is short-sighted to view the value of a relationship in terms of the revenue derived from an initial engagement. Rather, the following must be considered:
- Repeat purchases over the lifetime of the relationship
- Cross purchasing of additional products and services
- Price premium due to the appreciation for the experience
- Positive word of mouth in terms of referrals
- Appreciation and enjoyment when interacting with staff
Many growth-oriented firms use acquisitions, aggressive pricing strategies, marketing campaigns, and sales blitzes to improve performance. While these strategies give the organization a short-term boost, they are not long-term solutions. Customer engagement and loyalty is the most solid plan. Real growth occurs because there is a “love affair” between an agency and its customers – when the customer can’t wait to sing the agency’s praises to friends and colleagues.
Let’s use an example. ABC Company becomes a new client with revenues of $10,000 for its initial engagement with your agency. In the years ahead, your firm has met or exceeded each and every client expectation. Taking that into consideration, ABC Company becomes a “raving fan.” And the relationship grows exponentially as shown on the below Lifetime Value Profitability Chart:
As the above chart indicates, the following occurs:
- ABC continues its engagement on its initial product line yet becomes less price sensitive.
- Because all expectations have been met or exceeded, ABC is pleased to expand its relationship through cross sell initiatives.
- ABC becomes an advocate and a key referral source.
- The relationship is of such value that ABC is willing to pay a premium for the experience.
In the case of ABC, the net present value of its relationship is $350,000 over the seven-year term. For a $10,000 initial deposit, what a return!
How do you determine the lifetime value of your customers?