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Use customer relationship management software to measure CLV in B2B industries.
Companies spend significant time and money acquiring new customers, often dedicating entire sales and marketing budgets to customer acquisition efforts. However, not all customers are the same. Some buy from you because you’re offering the best deal. Others are long-term, loyal customers who will do business with you repeatedly.
Often, it costs the same to attract both customer types — even though long-term customers are more valuable. For B2B businesses to truly maximize the ROI of their sales and marketing efforts and earn repeat business, they must evaluate the customer lifetime value (CLV) metric.
The CLV metric measures the total revenue a business can expect to generate from a particular customer over the length of the buyer-seller relationship. This calculation considers both acquisition and retention costs, making it a key metric for understanding long-term profitability.
CLV is about predicting future earnings. It’s a type of predictive data analytic that forecasts a customer relationship’s future value.
Lauren O’Brien, chief revenue officer at Cloudastructure, highlighted the importance of customer retention in optimizing CLV. “Customer retention, of course, is key in this game,” O’Brien explained. She noted that her company, a B2B business, maintains nearly 100 percent customer retention; also, it’s reevaluating its pricing strategy based on insights into customer acquisition costs (CAC) and CLV.
“On the flip side, our CLV is huge per customer,” O’Brien continued. “Because of this, our focus on customer retention is critical and almost as important as generating sales.”
By definition, CLV isn’t a fixed number. It varies depending on the factors a business chooses to include. However, the following is a commonly used formula for calculating CLV that emphasizes the significance of customer retention and relationship longevity:
CLV = gross contribution per customer x (yearly retention rate/1 + yearly discount rate – yearly retention rate)
While this formula works broadly, businesses often adjust it to suit their specific needs and priorities.
CLV is widely adopted in B2C industries. This is especially true in retail and telecommunications, where companies benefit from analyzing data across large customer bases.
However, the stakes are higher for B2B companies because CLVs can be worth millions per account. Additionally, CLV approaches differ in B2B and B2C industries. For example, in B2B businesses, executives’ judgment and experience are often more helpful and reliable than statistics because they have considerably fewer customer accounts. In contrast, a more statistical approach makes sense for B2C companies with numerous disparate customers.
Adding another metric to the pile of estimations sales teams deal with can be daunting, especially if it will affect their key performance indicators (KPIs). Still, O’Brien stressed that understanding your CLV — and having the patience to let that value materialize — can completely change your entire customer acquisition strategy. “You would be surprised how you can improve your pricing and sales strategy and accelerate sales by understanding these metrics,” O’Brien noted.
Want to get your salespeople on board? Share the following ways CLV metrics can improve and benefit sales and marketing departments’ efforts.
Understanding CLV allows sales teams to identify and prioritize customer accounts based on their long-term value. This practice prevents disproportionate sales efforts on less profitable leads or clients. By analyzing various accounts’ comparative values, your sales team can focus its time and resources on nurturing high-value relationships.
For example, say customer A has a $200,000 CLV, and customer B has a $10 million CLV. Knowing this, your sales department can more efficiently prioritize nurturing and retention efforts.
Stephan Liozu, chief value officer at Zilliant, explained the unique challenge of applying CLV in B2B. “In B2B, lifetime value takes on a unique dimension, as procurement teams are generally structured to focus on short-term savings rather than long-term value,” Liozu explained.
This highlights the need for sales teams to use CLV metrics to shift their focus from immediate wins to customers who bring sustainable revenue growth. By nurturing these valuable client relationships, salespeople can increase their sales efficiency and reduce time spent on cold calling and prospecting.
CLV measurements can yield true revelations for more successful sales account management. You may view an account as mediocre; however, calculating its CLV can show that it’s woefully underdeveloped, with more potential than your team realized.
For example, say your team has made only a few random sales in small batches to customer A. This customer likely hasn’t made an impression on the sales department and isn’t really on the radar. However, when you calculate this client’s full potential for the expected length of the relationship, you may realize it’s actually in the top 20 percent of your business’s accounts. Knowing this, you can rethink the account’s development strategy.
CLV’s predictive nature provides valuable insights into a company’s market potential based on its real accounts. It offers a holistic, multidimensional view of growth opportunities — enabling more informed long-term planning.
For instance, calculating the CLV of your entire customer base, strategic accounts, or regional market segments can help you uncover trends and areas for optimization. This data ensures that decision-making isn’t skewed by customers whose short-term value might be insufficient or misleading.
Alex Schlee, founder and CEO of Anamap, highlighted another advantage of CLV. “Used for comparison purposes, CLV also allows companies to find high-value segments of customers and optimize toward getting additional customers from that segment,” Schlee explained.
By identifying and targeting these high-value segments, companies can refine their strategies to acquire and retain customers who contribute most to their long-term success.
You and your sales team must agree on your CLV measurement approach. Here are some of the most critical points to consider:
Recorded assumptions aren’t hard data. Still, they’re instrumental to CLV calculations at B2B companies because there are so many subjective factors to consider.
Relevant assumptions can cover various factors, including the following:
These assumptions are part of a sales rep’s CLV formula breakdown, complete with descriptions and quick “justifications” of the variables. With no assumptions recorded, tracking a mistake or misjudgment may be impossible.
Businesses have accounts of varying sizes. For this reason, introducing two distinct CLV calculation types makes sense:
When introducing CLV as a metric for measuring sales force performance, it’s critical to set up realistic quotas. Ideally, you’d set the quota at 80 percent of the actual CLV and 60 percent of the potential CLV. This ratio will encourage sales reps to work on accounts more willingly.
Mitigating the human factor in CLV calculations can be the most significant challenge. Consider the far-reaching implications of the following situations:
For many B2B companies, incorporating the CLV metric into sales strategies can become a cornerstone of corporate CRM policy. The metric has its downsides, such as reliance on human judgment and challenges in areas with high uncertainty. However, its benefits often outweigh these limitations.
By defining individual customers’ contributions to the seller’s revenue streams, CLV helps businesses prioritize accounts. It also helps set better business goals and align resources more effectively. In addition, it can assist sales teams in identifying new opportunities for account development, nurture high-value relationships and foster long-term business growth.
Jennifer Dublino contributed to this article.