I have written many times about the importance of customer lifetime value (LTV), about its central role in determining a company’s success and how to impact it. In this post, In this post, I will address how to manage users (customers, players, etc.) based on LTV.
Profitability, success and LTV
The success and growth of your company comes down to one basic principle, your customer LTV needs to be greater than the cost of acquiring and servicing the customer. The larger the difference between the value you get from a user and the costs associated with that user, the greater your profits. The greater the difference, the more resources you can devote to user acquisition. The greater the difference, the more someone will pay for your company.
The key to optimize the value of a customer versus their costs is not treating all customers the same. Each customer has a different LTV, which can be estimated from everything nearly all the data you are collecting, including from how you acquired the user, their demographic, their initial behavior, etc. The first step to optimizing your business is to determine your different customer segments (VIPs, heavy spenders, occasional spenders, one time spenders, social whales, browsers, etc.). You then put all of your users (hopefully automate this process) into these segments.
Managing a customer portfolio
Once you have segmented your users based on their behavior and predicted lifetime value, you need to manage actively this portfolio of users to optimize your profitability. For each segment, you need to build a strategy that maximizes the difference between the LTV and the costs. For users who spend frequently, you may want to give them enhanced customer service and free gifts so they come back (and spend) even more often. The costs of this additional service and gifts are more than offset by the additional revenue you generate. Conversely, for the one-time purchasers, you want to minimize expenses tied to them. Since they have a low lifetime value, you do not want to devote any resources (costs) to them. By allocating resources only where it increases the difference between LTV and costs, you optimize your profitability. Continue reading “Lifetime Value Part 13: Managing users and customers profitably”