Customer Lifetime Value — The Only Metric That Matters

It’s that time of year again — when football fans are gearing up to kick off their season. Sports fans can sometimes be the most visible in terms of loyalty — everything from buying season tickets to wearing face paint to analyzing the play-by-play of every single game from their home television. While you can never calculate someone’s Customer Lifetime Value simply by looking at them, in sports it’s certainly more obvious who is die-hard and who isn’t — and maybe even a few shades in between.

So what about companies where it’s less obvious? Unfortunately, people don’t wear red face paint and stand outside of Target and boisterously cheer on all the shoppers. However, Customer Lifetime Value — or LTV, for short — is one of the most important metrics a business can have.

As a measure of the amount of profit you can expect to generate from a customer over the entire time they do business with you, LTV tells you a lot. It lets you know who’s in it for the long haul, and who’s not; who’s going to invest time, energy and money in your products and services for years to come, and who might just be fairweather. That’s information you can use to decide how to allocate resources for marketing, customer retention and other areas so that you get the best possible return on those resources.

In the absence of customers prominently displaying your logo and colors everywhere they go, here’s some good information about how to measure LTV and what you can do to increase it.

Calculating LTV

A recent Entrepreneur article called lifetime value one of the most important metrics in business, mainly because it can give you an idea how much repeat business you’re likely to get from someone. The article also referred to it as one of the easiest metrics in business. However, according to an Econsultancy study, only 42% of companies say that they are able to measure customer lifetime value.

Why is LTV such a challenge for such a large percentage of companies? The Econsultancy report states it’s in large part because so many organizations are operating in disconnected silos and lacking in integration, making it difficult for them to manage LTV. As someone who runs a business that’s devoted to helping companies extract as much value as possible from all the customer data that’s available to them, that struck a chord with me. I truly understand how problematic silos can be, and believe that a unified, coherent approach to data and operations is an essential part of running a business.

For companies that haven’t been successful in measuring LTV, maybe the key isn’t to think of the calculation as easy, but to think of it as simple – and not to get mired in performing in-depth analyses that can be tough for a company with a lot of siloed components. I recommend starting with as simplified an approach as you can find — like this one. When you’re ready for something a little more in-depth, check out this online calculator from Harvard Business Review.

Increasing LTV

Regardless of how you measure LTV, it’s important to do whatever you possibly can to improve it. When you succeed in getting customers to come back again and again, over time — the way loyal sports fans come out for their teams, season after season — you create a source of revenue that costs relatively little to maintain and that therefore has great profit potential for your business. Here are a couple of things you need to be sure your business is doing if you want to improve LTV.

According to Greg Wise’s HubSpot blog, using data more effectively is one of the most statistically sound things you can do to increase a customer’s LTV. Think about it: Every time people interact with your business — on your website, with a mobile app, or in whatever other way it happens — you collect data about them. That’s data goes far beyond basic information, like how many ecommerce visitors came to your site and what they bought. The opportunity to expand what you know about these visitors and use that data to create a significantly better experience for them, and win more of their long-term business, would be a missed opportunity that could significantly impact your business.

One thing that a broad cross-section of LTV experts agree will boost this metric is superior customer service. The aforementioned Econsultancy study, cited by HubSpot, ranks customer service improvements as the #1 tactic for improving LTV. Kissmetrics points to the 70% return-visitor rate that Disney Parks achieve, and points to Disney’s commitment to“constant and never-ending optimization” as the key to keeping customers coming back for more. And customer satisfaction monitoring company Client Heartbeat talks about the importance of having multiple touchpoints to deliver superior customer service. Whatever you’re doing to improve customer service, take satisfaction in knowing that you’re likely increasing LTV in the process.

I can’t stress enough how important LTV is to your growing business’ long-term success. It may not be as easy to recognize in your customers as it is in a group of rabid football fans, but it’s worth the effort. Find a formula that works for you. Think about how you can better integrate the silos of information and operations in your business to support this metric. And start doing what you can right now to boost it. I’ll be the first to cheer you on.

To view the original post, please visit Forbes.com.