Client Relationship Lifespan
The lenght you retain a client is a major factor of its lifetime value.
A key aspect in the customer lifetime value (CLV) calculation is time spent as a customer – commonly referred to as the customer's lifetime. When we refer to the customer's lifetime in a marketing context, we consider the average length of time a consumer is a customer of the brand or a firm.
Obviously, the average customer lifetime is derived directly from its customer retention or loyalty rate. The higher the degree of customer loyalty, the greater the percentage of customers that return year after year – then the longer the average customer's lifetime will be with the company or brand.
Average customer lifespan – The average number of years that a customer continues to buy the company's goods and services. – if the definition is quite simple, the real-life computation gets tricky.
Customers come and go, and it's critical to know how much time and money you have invested into each one.
Customer lifetime value (CLV) is one of the most important metrics your digital agency should be tracking to grow predictably.
- CLV determines the value of each customer, telling you how much you can spend to acquire and retain each customer and, in the end, helps you improve customer value.
- CLV informs you today what you can expect from a client, or what is already consumed.
Customers are gained and lost over any company's lifetime. This length of the customer relationship will have a considerable impact on the overall customer lifetime value.
Calculate your customer lifetime value to grow predictably.
It helps your budget: If you can effectively calculate the average value of a customer, you can better understand your budget and how many new or existing customers you need to keep your business afloat.
You better understand how to retain customers: If you know how long the average customer stays with you, you can easily break down how or why they left. You can really look at what you're doing right and – more importantly – how you can improve to retain loyal customers that order from you time and time again. Keeping stable customers is the key to increasing the average value of a customer.
You, ultimately, will increase profit margin: of course, the higher the value of your average customer, the more profits you make. Who doesn't want that?
Customer lifespan is the retention period. In other words, it is the period you were able to retain a customer in your client portfolio.
A customer's average lifespan is the average time a customer remains active before they drop off and go "lost." Meaning that if the time between a customer's first and last purchase is 365 days, then (t) would be equal to 365. If the definition is quite simple, the real-life computation gets tricky.
This final piece of customer lifetime value may be the hardest one to calculate accurately.
For this simple method, we will need:
- the list of invoices you've sent to your customer and the issue date and,
- The date a client was considered lost.
The second piece of the puzzle is the 400-day latency period kopilot applies before considering a client automatically as lost.
A customer relationship starts the day the first invoice is issued.
The customer relationship ends:
- the day you mark the client lost, or
- 400 days after the last invoice issue date.
If you've issued an invoice before the 400-day delay, the customer relationship counter is reset.
The day you issue an invoice (after the latency delay), a new customer relationship starts.
Of course, you must adapt the model dynamically according to all the possible operations: adding an invoice in the past might change the number of relationships, operations to exclude, etc.
From the software industry, we often observe that lifetime equals 1/churn. This model works pretty well for subscription-based businesses, not for service companies. It has another significant limitation: the critical assumption behind this approach is that the churn rate is constant. In most cases, it does not hold in practice, but still, it can give you a good estimation.
Some solutions count the number of days between the first invoice and last invoice date. This method ignores the period without business with your client.
Image a client that purchased from you six years ago, and buy again last month? Could we make the statement that he has a six-year lifetime in your portfolio? Certainly not; it has not common link with the reality of your daily operations. Those clients completely fucks up the prediction by extending the relationship! But we can't ignore them by excluding them from the method.
Some people stop counting on the day you issued the last invoice. This method fails when you have clients with periodical subscriptions. This method prevents you from looking ahead.
Let's take a client with an annual subscription for the hosting of its website. Should we consider it has a one-day lifespan? Certainly not. This method shortens the expectation you might have.
For those reasons, at kopilot, we prefer to use the concept of "customer relationship lifespan".
Calculating customer relationship lifespan rather than applying client lifetime bring two critical advantages: (1) making visible your ability to renew business with your dead client and (2) organizing your reactivation campaigns.
(1) Answer the question "Are we able to reactivate lost clients?" As soon a client has more than one customer relationship, you were able to reactivate a lost client. Something happened to renew the business. Let's figure out what.
Was it your move? Was it luck only? Take a note to capture your best reactivation tactics.
(2) Organize your reactivation campaigns: it might be scary - even paralyzing - when we are told to reactivate lost clients. Where to start? How to proceed? What can we propose?
When looking to reactive lost clients, start with whom have the most relationships. You were able to make them back in the game previously. It will probably be more comfortable to contact them than one-off clients. More accurate predictions: each time you sign a new client, you'll know how long the relationship will last and the number of times you built a relationship.
You don't need to make crazy calculations. You need to be aware of the value that a customer provides throughout its life. Being aware of your Customer Relationship Lifespan allows you to make smart marketing decisions that drive your small business's long-term growth!