Circular customer LTV implies some considerations:
- Acquisition costs. Due to the need to educate some segments or specific customers, these kinds of costs will probably be more significant than in a standard linear product or service.
- Lifetime extension. As most of the circular designed products aim to extend their time in use, you can expect an extended LTV, meaning more value in total from each product to the customer or market segment.
- Customer development costs. Longer product life means a prolonged and more intense customer relationship. All the maintenance and repair services aimed to extend the product life have to be used to gain valuable customer knowledge and market insight. The seller has to support a part of them. On the other hand, it will be a new income source by billing these services, and it should be considered an investment in loyalty activities.
While it may seem counterintuitive that a longer product life can increase revenue, it actually does make sense if you look at the customer relation over time.
The customer's lifetime value follows a specific logic and has an evolution over time, both of which we present in the graph below.
On the vertical axis, the different sources of margin generation with the customer over time are represented:
1. The Base Sales margin is the margin generated by the sales that this type of customer may have according to their profile as a customer or consumer. If we work well with the customer, the margin of these sales from the first sales to the customer will progressively increase as the volume of sales increases until it reaches a level close to the maximum for this type of customer.
In other words, customers who buy a circular product that they are happy with, will likely come back and buy some more.
2. As our relationship with the customer progresses, and trust became consolidated, space and time appear for UpSelling, which includes two variants: upselling itself, which implies consumption beyond expectations according to their profile; and upgrading, which means that from this base of satisfaction and trust, we can convince the customer that the volume they buy from us and the margin we generate, as a result, will be of a higher range product or service, so that for the same volumes, the margins generated are likely to be higher.
In the longer run the happy customers may even exceed our expectations in buying even more, or in fact return with earlier products to get them refurbished or upgraded.
3. As in the previous point, Margin-Up is not about improving the margin because a superior product is purchased that generates more margin, but about the effect of enhancing the margin by learning and integration between customer and supplier. As the relationship between the two becomes more robust, the supplier gets to know the customer better and can offer the products or services less friction and less effort. This lower friction and effort translates into a lower cost for generating the same sales volume, which ultimately becomes a Margin-Up.
When the customer relationship grows, the circular business can start making new products on demand, or even bespoke solutions to specific customers that they cannot get anywhere else.
4. Cross-Selling means expanding the customer's sales base by adding new products or services to our offer, which our customer did not initially purchase. Over the customer's initial sales base from a first product or service, new sales bases will appear coming from the following products or services that, based on the trust of our relationship with the customer, are incorporated into our commercial relationship with the customer.
Now we are really talking about Brand loyalty. The customers will start buying other products from the circular business just because they are producing them.
5. Finally, an additional source of margin generation is referrals or Prescription. When a customer refers to us, it does not create additional revenue in itself. Instead, when a referral occurs, the margin of the customer on whom the referral has been made is improved. The acquisition cost of the prescribed customer is reduced due to the effect of the reduction of commercial barriers exerted by the action of the prescriber. If we lose a customer of this type, or if he ceases to be an active prescriber, we will lose not only his margin but also the reductions in the cost of acquiring customers who will not now be the object of prescription.
With customers like these - who needs advertising? Using the leverage from loyal customers will outweigh most ad campaigns.
On the horizontal axis, what is depicted in the graph is the evolution of customer acquisition and development costs. Again, two key issues can be seen:
In other words, customers who buy a circular product that they are happy with, will likely come back and buy some more.
2. As our relationship with the customer progresses, and trust became consolidated, space and time appear for UpSelling, which includes two variants: upselling itself, which implies consumption beyond expectations according to their profile; and upgrading, which means that from this base of satisfaction and trust, we can convince the customer that the volume they buy from us and the margin we generate, as a result, will be of a higher range product or service, so that for the same volumes, the margins generated are likely to be higher.
In the longer run the happy customers may even exceed our expectations in buying even more, or in fact return with earlier products to get them refurbished or upgraded.
3. As in the previous point, Margin-Up is not about improving the margin because a superior product is purchased that generates more margin, but about the effect of enhancing the margin by learning and integration between customer and supplier. As the relationship between the two becomes more robust, the supplier gets to know the customer better and can offer the products or services less friction and less effort. This lower friction and effort translates into a lower cost for generating the same sales volume, which ultimately becomes a Margin-Up.
When the customer relationship grows, the circular business can start making new products on demand, or even bespoke solutions to specific customers that they cannot get anywhere else.
4. Cross-Selling means expanding the customer's sales base by adding new products or services to our offer, which our customer did not initially purchase. Over the customer's initial sales base from a first product or service, new sales bases will appear coming from the following products or services that, based on the trust of our relationship with the customer, are incorporated into our commercial relationship with the customer.
Now we are really talking about Brand loyalty. The customers will start buying other products from the circular business just because they are producing them.
5. Finally, an additional source of margin generation is referrals or Prescription. When a customer refers to us, it does not create additional revenue in itself. Instead, when a referral occurs, the margin of the customer on whom the referral has been made is improved. The acquisition cost of the prescribed customer is reduced due to the effect of the reduction of commercial barriers exerted by the action of the prescriber. If we lose a customer of this type, or if he ceases to be an active prescriber, we will lose not only his margin but also the reductions in the cost of acquiring customers who will not now be the object of prescription.
With customers like these - who needs advertising? Using the leverage from loyal customers will outweigh most ad campaigns.
On the horizontal axis, what is depicted in the graph is the evolution of customer acquisition and development costs. Again, two key issues can be seen:
- Customer Acquisition Costs. As the graphic shows, the vast majority of customers start with a negative economic balance. Therefore, we begin by investing in customer acquisition. However, we have not yet obtained any sales, or the deals got offers a margin that is not sufficient to achieve a positive result for the customer in that period.
- Customer Development Costs. As we work with the customer, the costs are reduced, but they never disappear because we will always have to adjust our offer and services, communicate with the customer, develop and direct promotional actions, etc.
Suppose we combine the dynamics of reducing customer relationship costs with increasing margins from the various sources we have seen. In that case, we can intuit the positive evolution of customer profitability. What will be decisive for both dynamics, cost reduction and increase in margins, to occur is that we have a segment in front of us that we are able to satisfy. This satisfaction will allow us to create linkage and continuous improvement, which will enable us to extend the customer's LifeTime Value and reach the temporary scenarios where profitability is maximised.
So the most important thing to remember is: Know your customer base, and keep them happy.
