Do you know how much each customer is worth to your HVAC business? You might be surprised to learn that the answer is trickier than it would seem at first glance.
Many small- and medium-sized business owners focus almost exclusively on new customer acquisition and the expense of customer retention and engagement. To realize the full potential lifetime value from your customers, though, you first need to understand how customer lifetime value (CLV) works, and then use that knowledge to engage and retain more of your existing customers. Read on to learn what CLV is, how to calculate it, and how you ultimately can use it to your advantage.
What is Customer Lifetime Value?
Customer lifetime value (CLV) is the predicted net profit that a company will make from a customer during his or her entire lifetime as a patron of your business. Because you can’t know definitively how long your relationship will be with your HVAC customers, the value of your CLV will be based on an estimate. For instance, you might calculate a customer’s CLV for 24-months, 48-months, 60-months, etc. based on your company’s average length of customer retention.
This metric serves an important purpose. It can help identify the ceiling for spending on new-customer acquisition, and it’s key in determining your return on ad spend (ROAS) and other marketing measurables. Focusing on CLV will help you shift your thinking from acquiring a lot of (likely one-time) customers cheaply to optimizing acquisition and retention spending for maximum lifetime value.
CLV will help inform your decisions in every aspect of your business. When deciding on budgets for advertising and marketing, for example, CLV will give you an idea of how much you should spend to attract a new customer. In product development, CLV will reveal how you can offer HVAC services and products tailored to your best customers. In customer support, CLV will guide your decision on how much to spend to service and retain your customers. Finally, in sales, CLV will tell you what types of customers you should spend the most time and money on trying to acquire.
How to Calculate Customer Lifetime Value
There are several different ways to calculate CLV. These are the three most common, and it’s recommended to understand how all three work:
- Simple CLV Calculation: The easiest method is the “simple CLV equation,” which is “52(a) * t,” with “a” being the average customer value per week (expenditures X visits, in USD) and “t” being the average customer lifespan. So let’s say your average customer value per week is $25, and your average customer lifespan is 10 years. Note that we’re multiplying by 52 because there are 52 weeks in a year. Plugging those variables in, that yields a CLV of $13,000.
- Custom CLV Calculation: The second way to calculate CLV is the “custom CLV equation,” which is t(52 * s * c * p), with “s” being average customer expenditure per visit, “c” being average number of visits per week, and “p” being profit margin per customer.
- Traditional CLV Calculation: The third most common way to calculate CLV is the “traditional CLV equation,” which is m(r/1+i-r), with “m” being the average gross margin per customer lifespan, and “r” being the customer retention rate. To get “m,” multiply the value you get from the simply CLV equation, $13,000 in our example, by your profit margin per customer, let’s say 22 percent. That would yield an “m” value of $2,860.
For the most accurate CLV value, you’ll want to use all three equations and calculate an average of the three values. And as we mentioned before, keep in mind that you’re working from an “estimated” value approach; so if you’re finding that your estimated average customer lifetime simply isn’t accurate for your particular database, then you may need to adjust.
Understanding the Full Customer Lifetime Value for HVAC Dealers
Focusing on CLV means valuing long-term, quality customers over quantity. For example, say you acquire a customer on a tuneup or a service call and successfully keep them engaged with your brand through marketing. A few months later, their aging HVAC system breaks down beyond repair, and they call you for a replacement because of the trust you’ve already established. Then, on a subsequent visit to service the new system, the customer opts for a maintenance service contract.
In this case, a single $99 tuneup or $200 service call triggered a chain of events that eventually yielded more than $10,000 worth of business for your company. This is a perfect example of where you can see the full lifetime value of an HVAC customer. Given this, it’s clear that high-value HVAC leads are worth far more than the customer’s initial purchase.
Customer Retention and Reacquisition are Key
HVAC is a business where you have to continually reacquire your customers. Unlike high-affinity brands, HVAC customers tend to call whoever is available in their time of need, which means that many of your “loyal” customers may also be loyal customers to your competitors down the road. We often hear “my existing customers call through the tracking number,” and it is possible that we generated that lead in a prior year.
But HVAC customers need consistent engagement through your marketing efforts to remain in the fold. In fact, according to Kissmetrics, a mere five percent increase in customer retention can increase profits by 25 to 96 percent. Likewise, the same research discovered that it costs six to seven times more to acquire a new customer than to keep an existing one.
Clearly, retention and reacquisition are imperative. Leverage proven customer retention marketing tactics to keep customers engaging with your company and ensure as many customers as possible continue to be customers. Remember: Reacquiring that customer the next time there’s an issue can cost as much as the first acquisition in HVAC. Marketing automation and selling tactics like maintenance plans all help reduce the cost of acquisition; so while reacquisition is important, the goal should be to reacquire as few customers as possible.
So what does that look like in practice? Part of the beauty of CLV is that it can show you what marketing channels deliver your most valuable customers. You can then focus both your acquisition and retention efforts on those channels to see the most profitable results. CLV can show you where and how to go about engaging your customers with your brand.
Engaging High-Value HVAC Customers Consistently
The days of viewing customers in what they can do for your bottom line in the here and now are gone. Changing your focal point to each customer’s lifetime value will take your company much further. In the HVAC business, maximizing your CLV means engaging high-value customers with your brand consistently with effective marketing tools throughout the relationship.
And it all begins with getting a steady stream of high-quality HVAC leads for your business. At Mediagistic, our LeadBuilder® internet marketing solutions deliver the lowest cost per lead (CPL) in the HVAC industry. We’ve generated more than 2.7 million leads for contractors throughout the country by using a holistic, turnkey approach to HVAC lead generation. Get in touch with us today if you’re looking to accelerate customer acquisition for your HVAC business.
Luke Steinkopf is Mediagistic’s National Sales Manager. He works with local home services businesses across the country and provides solutions to help them achieve their growth goals. Connect with him on Linkedin.
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