One of the most important business metrics is the lifetime value of customers. In short, it is the expected amount that a single customer will spend at your business during their lifetime of patronage with you. Customers with a high lifetime value tend to spend more per purchase, spend more often, and remain loyal for years. The more high-value customers you have, the better your current and future business prospects.
Acquiring these customers may take a long time. This depends on whether increasing lifetime value is an active goal and on the methods used in the customer acquisition and retention processes. However, achieving rapid improvements in customer lifetime value (CLVs) is doable with a concept that was discovered over a century ago.
What is The 80-20 Rule?
While there are many ways of stating the 80-20 rule, the most useful of these for businesses is that 80% of your results will come from 20% of your X. X can be words such as efforts, investments, employees, advertising sources, customers, etc. Your "results" with respect to customers could be sales dollars, profits, or other metrics. For example, 80% of your sales dollars will come from 20% of your customers.
To some, it might seem mysterious why the rule should work at all. But the reason is that most things are unevenly distributed. Some apple trees grow more fruit than others. Some employees are more productive than others, and some customers are more profitable. The ratio is not always 80-20 and the percentages do not always add up to 100%. Nevertheless, a minority of inputs, sometimes called the vital few, will usually have a disproportionate effect on your business. In addition, the 80-20 rule can be used to find the causes of businesses problems. For example, 80% of your customer service headaches will be caused by 20% of your customers.
Increasing Your customer lifetime value With the 80-20 Rule
Rather than dividing your resources equally between different types of marketing campaigns, let the 80-20 rule tell you which of these campaign types yield the best results. If 80% of your high lifetime value customers come from only 20% of your marketing campaigns, you should determine the commonalities between these successful campaigns. Perhaps they have a single demographic in common, or perhaps it was a specific promotion. Greater focus on this commonality will increase your marketing ROI.
For example, if a marketing email was responsible for acquiring 80% of your high lifetime value customers, you might want to commit more resources to your email marketing strategy. Note that campaigns bringing in high lifetime value customers will not necessarily bring in the most initial sales. Initial sales, and CLV are different business metrics.
The 80-20 rule applications discussed so far, will efficiently increase the number of high lifetime value customers. However, you can also apply this rule to increasing the lifetime value of your current best customers. If you are using a large variety of reward programs, upsells, and cross-sells to increase customer lifetime value, look for 80-20 patterns in your data.
For example, if 20% of your reward programs were responsible for most (80%) of your customer lifetime value improvements, then committing more resources to these programs and reducing resources to the other 80% are worth your while. Look for 80-20 patterns in your upsell and cross sell data as well.
Note that the 80-20 rule works best with a large amount of data. Online sample size calculators are available for determining the minimum sample size that is statistically meaningful. The main takeaway here is that for long-term business success, you should seek to improve the lifetime value of your customers, and that the 80-20 rule provides an efficient way to go about it. 80-20 patterns are (almost) everywhere. Look for them in your business data, especially when seemingly inexplicable spikes in sales or CLVs occur.