Unlike the customer lifetime value -also known as LTV, the incremental customer measures the value of a customer over a specific period. Having such a short measurement span makes incremental customer value good at assessing different business decisions, especially ones that are related to marketing and pricing.
Knowing the incremental customer value for a specific user group can help you decide whether addition marketing spending that targets this group is worth it or not. Also, tracking the ICV can help you asses the effect of different business decisions.
Incremental customer value can be considered a metric for the customer lifetime value. However, calculating this specific metric is essential.
What makes the incremental customer value important?
There are plenty of reasons that make incremental customer value an important metric for any successful business. If properly utilized, it can provide insights that make effective decision making inside a company much easier.
The following are some of the main reasons why incremental customer value is that important.
Determine which customers are investment-worthy
Successful companies make the best use out of their resources. No matter how big your company is, money is a limited resource that you must make the most use of. When spending money on business activities like marketing, getting the best ROI is crucial.
Unfortunately, not all customers are profitable as you think they are. Comparing the incremental customer value as well as the CLV of different customer groups will help you see this clearer.
Once you know which user groups are worth investing in and which aren’t, you can spend your money more efficiently and have a better ROI on your marketing activities. Spending more money to market your products to some user groups would make sense, however, it wouldn’t mean much to others.
In addition to making your company’s spending more efficient, this will help you better allocate your resources in the future.
Understand how customers perceive your brand
The research process that is required for determining the incremental customer value can tell you more than just that. One of the important things that you’ll know when doing the required research is how customers perceive your brand.
Knowing how customers think of your brand and what is your current position among similar brands is essential for business success. By knowing this, you can improve the overall strategy of your company to better achieve its goals.
For example, you might find out that your products are under-priced or that the customers that you spend a ton of money to target with ads aren’t really the people that you need to impress.
In many cases, business owners have an image is completely different from how their customers perceive it. Getting inside your customers’ head is an essential reality check for any business.
Redirect company resources
In addition to knowing what customer groups are worth spending marketing money on, the incremental customer value can help you determine business activities that are worth spending money on.
Your company might be dedicating lots of resources to something like R&D. The data, however, could prove that this won’t result in a good ROI and the money would be better spent on something else. Perhaps spending more on marketing your products would have a better impact on your bottom line.
Whatever the best resource allocation might be, calculating the incremental customer value can help you figure that out while eliminating the guessing factor from the process.
Improve your pricing
Another thing that incremental customer value can help you with is your overall pricing strategy. By knowing which customer segments are more profitable for your business, you can adjust your pricing to penetrate some of these market segments.
If you use value-based pricing, you can raise your prices to make the most out of your products or even to improve the way people perceive them. No matter what pricing method you use, knowing your incremental customer value will help you make it better.
How to use incremental customer value
- Define a period for which you want to calculate the incremental customer value.
- Calculate the profit contribution of the target customer group during the period for which you’re doing the calculation.
- Figure out the customer value that’s expected without additional marketing spending.
- Calculate the value that could be generated from future marketing efforts to this specific customer group.
- Decide if the additional marketing spending is worth it.
- Used to get a clearer understanding of a customer’s value to a business that can be retained without spending money.
- To better understand the incremental value of a customer, you need to know their lifetime value.
- Incremental customer value is essential for good short-term marketing decisions.
- Pay close attention to incremental value for different customer groups as they can show you spending on groups that aren’t generating growth.
- Incremental customer value is affected by many business decisions. Use this to measure the effects of these decisions.