Increasing the Lifetime Value of Your Customers

- October 5th, 2008

In this article:

Determining the lifetime value of a customer
Choosing the right customers to focus on
Developing higher value customer relationships (CARLA)
Building an effective referral system

Earning the business of a new customer is six to seven times more expensive than retaining an existing one according to Bain & Company director emeritus and author of The Loyalty Effect, Frederick Richheld. So it makes sense to focus marketing efforts, not only on new customer acquisition, but also on increasing the lifetime value of your existing customers.

The lifetime value of a customer is made up of two critical components.

The amount of money they spend with your company before deciding they no longer need your products and services, or before switching to a competitor.
The value of referrals that your customers generate

The second part is often overlooked because it’s not immediate or easy to measure. In fact, many businesses have difficulty creating and tracking this hidden value, so they choose to only focus on acquisition and retention.

But creating a golden cycle of customer acquisition, retention, and referral doesn’t have to be complicated. And there are Internet-based tools that help you create and manage this golden cycle, in ways that provide measurable returns on investment and a personal connection with customers that can’t be achieved without power and versatility of the Internet.

Choosing the Right Customers to Focus On

The first step in creating a strong customer retention and referral plan is choosing the right customers to focus on.

In his book The Ultimate Question: Driving Good Profits and True Growth, Reichheld notes: “To understand the connection between customer relationships and growth, begin with a simple fact: In business, every decision ultimately involves economic tradeoffs. Every company would want better relationships with customers if these relationships were free.”

The fact is, it costs time and money to build customer relationships, and some will develop into strong, long-lasting partnerships.

Three Types of Customers

Customers will usually have one of three reactions to your products and services: like, dislike, or tolerance. Reichheld calls those who like your company (and are willing to tell their friends) “promoters” and those who don’t (and are more than happy to tell the world) “detractors”.

Promoters, he says, account for between 80 and 90 percent of positive referrals. It’s critical to focus on these potential evangelists who are willing to invest in you, and the easiest way to identify them is to ask them one simple question: Will they recommend you?

The ones who answer “yes” invest loyalty in your products and services by spreading the word to their friends and colleagues. Recognize that they’re taking a risk too - if you fail to come through for these referrals, your promoters look bad as a result.

Developing Higher Value Customer Relationships (CARLA)

Since your promoters are in the position to quickly and inexpensively generate revenue for your company, you need to focus on building positive relationships with them. To do so, you can employ the tactics of CARLA:

Continue to keep in touch with promoters through “sticky” marketing material such as email newsletters and viral campaigns. Detractors will usually opt-out quickly (which means less wasted resources) and promoters will
Ask about their experience with your company and don’t be shy about requesting referrals. Many customers are thrilled to recommend you if you communicate with them personally, face-to-face, by phone, or by email. And many will let you use their names and quotes as testimonials.
Reward promoters for their loyalty. This doesn’t have to be expensive. Sometimes a handwritten thank you note is more than sufficient to show your appreciation, but a promotion that rewards both the promoter and their friends helps you create a community around your company.
Link with your customers through social networking sites (LinkedIn and Facebook, for example) as well as social review sites (Yelp and CitySearch, among others) and blogs. These types of online “relationships” help you measure your business’ reach.
Affiliate with promoters to encourage and reward referrals. Amazon.com is famous for rewarding people who send others to their website to buy products. But the concept isn’t just for retailers: an affiliate program creates a formal network of people and businesses who have signed on to support your company.

Building an Effective Referral System

Developing promoter relationships into an effective referral system has traditionally been time-consuming, but when I look at our clients, the ones who have built the most effective referrals systems have one thing in common: they use their website as their flagship.

This presence allows them to build an online identity, bolstering their reputations as industry experts and reaching an exponential amount of potential customers. When building your referral system, keep these things in mind:

Automate generously. Internet tools for drip marketing such as email newsletters, reminders, RSS feeds and other “sticky” items give people reasons to return to your website. And they scale: you only need to set them up once to be effective for every customer you have.
Speak authoritatively. You know your business and customers rely on you to be the experts in your industry. You’ll instill confidence in your promoters by sharing your knowledge and experience, and confident promoters will bring others into your network.
Create action. How many times have you visited a website, gotten some information, and then left? This is a lost opportunity for the website owner. Embedded and obvious calls-to-action let visitors know exactly what you offer, how they can benefit, and what they should do next. If you leave prospects and promoters to figure out what they should do next, they’ll just leave.
Make it easy. Customers appreciate being able to take action without going through a lengthy series of steps or typing an essay. Even simple forms can turn off a potential customer - the more fields they have to fill out, the less likely they are to take action.
Integrate everywhere. Be sure to promote your website and encourage referrals across all your marketing initiatives. Advertisements vanish: the spot finishes, the paper gets recycled, and the trade shows end. But your website is always there and open 24/7, so it makes sense to create and invest in its lasting value by integrating it into all your online and offline campaigns.

Tags: Lead Generation, Referral Marketing