Customer lifetime value and segmentation is this week's episode of the I Hate Numbers podcast.  Last week I kicked off with part one I will be continuing from part one my exploration of customer lifetime value by looking at

• Firstly CLV and net CLV calculation
• Secondly, customer segmentation
• Thirdly, customer retention.

These topics are important for anyone looking to improve their business profits, deliver a positive customer experience, or simply improve their understanding of their customers.

By segmenting customers according to their lifetime value, businesses can focus their attention on those customers who are most likely to generate long-term profits. Customer retention is essential for maintaining profitability, as it costs much less to retain a customer than it does to acquire a new one.

By understanding these concepts, businesses can set themselves up for success in the long run.

Customer lifetime value is a number that tells you how much profit a customer will bring your business over the course of their “lifetime” with you. To calculate this, you'll need to look at your customer's average order value, how often they purchase from you, and how long they stay with you as a customer.

Customer segmentation is a way of dividing your customers into groups based on shared characteristics. This can be helpful in understanding which customers are most valuable to your business and how best to communicate with them.  Take a look at this video for a visual of segmentation, accreditation goes to Hubspot for the table.

Customer retention is important because it costs much less to keep a current customer than it does to acquire a new one

Conclusion

So in conclusion, Customer lifetime value and segmentation is an incredibly powerful number helping you focus on the right customers and increase profits. In order to set this power free though, you need to do a little bit of work up front segmenting your customers correctly and then track their CLV over time.

It’s not rocket science, but it does require some effort.  If you are willing to put in the work however, the rewards can be great.

Are you ready to start harnessing the power of customer lifetime value?  Then listen to find out more.   Check out my I Hate Numbers YouTube channel,  Subscribe to I Hate Numbers now so you don’t miss an episode.  My book, I Hate Numbers will change your relationship with numbers and money, in a good way.  Check out what people have said, buy the book and make your own mind up, you won’t be disappointed.

In your toolbox of numbers. Customer lifetime value, or CLV, is multifaceted. It's powerful for all businesses, from private to social enterprises, acorn to oak size. The power and magic of customer lifetime value is more so when cementing your customers and understanding their CLV. In this week's I Hate Numbers podcast, part two of two. I'm going to be looking at how CLV and net CLV is calculated. Customer segmentation, customer retention and greater fortune lies there improving what you do and profits. We absolutely need them, unless hobbying is your goal.

You're listening to the I Hate Numbers podcast with Mahmood Reza. The I hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. Welcome to another weekly episode on I hate Numbers. This is the podcast with a mission to improve your financial awareness, help improve that battle that goes on between your ears, help you and your business make more money, save time, and save tax. What's not to love about that? Let's crack on with the podcast. Now, in last week's podcast, I introduced the topic of customer lifetime value - check out the show notes for a link to the episode.

And in last week's episode, we looked at what customer lifetime value is and why it's so important, how we go about calculating it for yourself. And we served three illustrations of three different businesses where CLV was used. Let's come back to this week's topic and dive into it deeper. Now, there's a lot of important factors to consider when you're running your business, but one of the most important, one of the most powerful numbers you can have is customer lifetime value, alloyed and connected to segmenting your customers.

Now, segmentation is nothing to do with dividing customers up into portions like an orange, but it's a measure of how much profit your company can make from each group, from each customer segment over the course of their relationship with you. The market segmentation is a natural result of the vast differences amongst people, according to Donald Norman. And later on in this podcast, I'm going to introduce the power of customer segmentation and give you a few thoughts about how you can segment your customers and give you a link to a resource that you can look at that in much more detail.

Now, knowing your customer lifetime value can help you make smarter decisions about things like what products to offer, what marketing campaigns you should be running, how to invest in acquiring new customers. So if you're looking to increase your profitability and if you foolish not to, it's definitely worth taking the time to understand and calculate your customer lifetime value. In terms of the calculation that we've adopted, we typically look at the revenue that we generate from an individual customer, a group of customers, the segments of customers or they generate over their lifetime. And let's not their lifetime of everybody just with you.

So in terms of how much they're spending, how many transactions they engage in and how long we retain them as a customer, we can calculate the revenue we then offset and match that against the costs. Those that are immediately associated with that customer transaction and ones that we should also take into account are the costs of supporting that customer. So typically we will have support costs, we will have credit control costs, we'll have a whole variety of costs here to take into account. And in an ideal universe we should allocate those resources against that customer grouping.

If this is your first time of engaging in this calculation, this first metric, I would always begin with something very rudimentary. Get a habit established of capturing the data to generate the number. Even if you do it at a very simplistic, gross level, it's better than having nothing at all. Let's move on to segmentation. Now, segmentation is where you've got customers either by demography, geography, behaviour, their needs or their value. Where those requirements are different, then you should be segmenting your customers. Different customers have different buying habits, different risks, different levels of profitability, different ways that we should be engaging with them and communicating with them. So dividing customers into those groups makes the information much more insightful. We don't treat all customers the same and not all customers will be the same.

Not just in the financial impact they make, but in terms of their behaviours, what they want. So differentiating and dividing customers into groups, into segments is a very powerful and practical way of looking at your business. There are a number of ways that marketers adopt to how to segment customers. A few examples could be by demography and by demography I mean based on age, gender, income, education and marital status. It can be based on fiscal location, where they live in the country, going down to as much detail as the postcode area, the state, the country, the town. You may also want to look at in terms of their behaviours, the tendencies, their actions, their purchasing habits. It may be based on what they need from you. What are their different pain points, what are their different requirements, what other solutions they're looking to serve?

If I take my own example of one of my businesses, in I hate numbers, we have customers who may just require the preparation of accounts and tax return on a once a year basis. We may have clients who require much more hand holding. They have businesses that are dynamic, growing, they need more in-house support from planning, from production of management accounts. We may have clients here who are ad hoc transactions coming into tax advice. They might be in fulltime work. So all those customers have different preferences, different needs that need to be addressed.

And that may be for us, a suitable way of looking at the customer segments. We treat all the customers the same in terms of the level of service, but in terms of what they buy from us, how they engage with us and how we communicate with them to attract and retain them will be different. Check the show notes and I will share with you a link to how a company like HubSpot go about segmenting and they recommend segmenting customers. Now, retention is typically three times more expensive to acquire new customers compared to retaining existing customers. Customer retention is a thing that we should be focusing on. Retaining the right type of customers, retaining those customers, that customer retention element dimension is really important.

The acquisition cost, the effort and the energy of acquiring new customers is much more than it would be for retaining the existing ones. If we've already got a relationship with our customers and we hang on to them, there are opportunities to make them aware of other services we may be offering. We have the opportunity for cross selling. So therefore having a dive deeper into customer lifetime value when we've got those segments gives us much more insight about what we need to do. The financial impact of those customer relationships is one thing, but we're also understanding what we're doing to actually hang on the communications, the onboarding, the whole relationship, gives us a much better way of knowing what we need to do to allocate resources, energies, effort and skills to retain and improve on that customer relationship.

By very nature, if we're going to get closer to our numbers and have a look at profitability on customers, looking at what customers generate by way of value, we're not looking at just raw numbers, but we have to understand what sits behind that. The whole stranger to a customer that gives us money for things that we provide to them. That involves a whole lifecycle of interactions, from onboarding to communication, to providing the product or service, to dealing with any issues that come back to us. And all of those require processes, all of those require time, investment and skills. And what it enables us to do is to look at what's going on at the moment. And if we are looking to improve, we can improve processes, attitudes and behaviours to actually ultimately improve the customer experience and also by nature, generate greater value for the organisation.

Now, if we combine the whole aspect of segmentation with customer lifetime value, calculating the metric is one thing, understanding what that metric is, that measure, is another thing. But actually understanding what drives there means that we have greater chances and opportunities to increase in our profitability as well. We may decide that one customer segment is underserved. We may find that the cost of supporting a segment are too prohibitive. That gives us the ability to try and improve divest of that customer group if it serves no purpose in our business. There may be customers that we've had historically and we've outgrown, we've moved on. But we're still serving that customer base. And if it's not generating financial value currently or long term, if it has no impact for our business going forward and it's consuming a disproportionate amount of resources, we either improve it or divest.

But ultimately profitability will be the result of that investigation, that evaluation, that analysis, and that action point. So folks, let's summarise what we've got. We're talking about segmentation, how powerful that can be. We're talking about some of the ways that segmentation can be done. We've talked about linking that to customer lifetime value. A customer lifetime value is ultimately the profits that we're generating from a customer segment. We know that CLV linked with segmentation gives us an opportunity to improve the communication between us and our clients, our customers, gives us focus about where we should be, diverting our energy and resources is powerful also in terms of forecasting and financial planning, when we build up our financial stories, when we build up our financial forecasts, knowing what they are by customers and by segments is much more powerful.

It could scope for improving what we do, making more meaningful decisions and all of that combined to helping us make more money. Now, to execute this, it has to be borne in mind that you need to know your customer. You need to understand their customer journey from stranger to delivery. We need to have the right systems that we can capture that data. If you don't have the existing digital systems, you don't have the existing systems to capture that raw data to segment, then start with something and build it up accordingly. I'll share a link in the show notes about how you can start your digital journey to at least tracking the financial impact on what's happening with our customers. Ultimately, we need ownership of this whole process. Folks, I hope you've got some value, hope you got some news out of this podcast. I'd love it if you could share with those who feel will benefit. And more importantly, I'd love it if you could leave a comment, give me some feedback on what you thought of the episode. Until next week's episode, folks. Happy segmenting.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.