Don't Make These CLV Mistakes
CLV, or Customer Lifetime Value, is one of the most important metrics to use in growing your business. Read the first article in this series, "CLV in Your Food Business", for a primer. In this article we will talk about the biggest mistakes food service operators make in calculating their CLV
Mistake #1: Using revenue instead of profit
If you do an internet search for CLV you will likely come up with a calculation like that below, a quick and dirty way to get an average CLV for your customers:
It’s good to know that your average customer will spend $510 with you over their lifetime as a customer, BUT that number does not tell you how much the customer is worth to you. What you want to know is how much of that revenue is left after the costs you incur to service that customer, i.e. how much is left to go towards fixed costs and trickle down to profit. This is gross profit. So if your gross margin is 45%, then your average customer is actually worth $229.50).
This mistake is even more crucial to avoid when looking at different customer segments as discussed below:
Mistake #2: Not segmenting your customers
Having the CLV (in terms of gross profit as discussed above) for your average customer is great, but the metric is even more powerful when you stop considering all customers to be average and start segmenting them. What you will find is that different customer segments have different CLVs: they are worth different amounts to you based on differences in spending habits or differences in gross margin. Knowing who your most and least valuable customers are can help you to develop a marketing strategy aimed at getting and keeping the right ones.
Mistake #3: Assuming customers in the future will be like those in the past
In addition to segmenting your customers based on demographics and buying behaviors, be sure to look at the changes in your customer base over time. For example, if you own a neighborhood restaurant it’s likely that your customer base started off as local consumers who are likely to return often. However, let’s say that after being open for 6 months you received a rave review in a local dining guide and began attracting customers from further away. These customers spend more, but return less often. The question for you becomes, how can you use the historical information about CLV to make assumptions about what it will be in the future? There is no exact science here, but make sure that it is a consideration. Past customers don’t necessarily resemble future customers.
Mistake #4: Not using CLV to make business decisions
Once you know how much gross profit each customer segment drives, and can be expected to drive in the future, use this number! It should be used as a benchmark to constantly monitor the changing value of each customer and as the basis of your marketing strategy to determine who you want to attract and how you can increase the CLV of each customer in order to increase your overall profit. For more on this topic, read the next article in our CLV series, “How Do I Use CLV?”