Do you know your customers’ lifetime value (CLV)? CLV defines the monetary value of your customer relationship by how much gross profit they have generated for your dealership.

If you divide your customer database into quintiles, you’ll discover that the top 20 percent is responsible for 79 percent of your gross profits, while the bottom 20 percent are net losers. Knowing how to identify these customers allows you to develop operational and marketing strategies that significantly impact your bottom line.

If you can replace just half of the bottom 20 percent with customers similar to those in your top 20 percent, your dealership’s gross profits will increase 40 percent.

CLV is an important concept because it encourages you to shift your focus away from monthly revenue goals to the long-term health of your customer relationships.

In marketing, CLV also helps you define how much you’re willing to spend to acquire new customers. If you’re going to spend $1,000 to acquire a new customer, you shouldn’t be indifferent to the value of that customer.

The use of CLV has two applications for dealers. Historical, rear-facing CLV scores can be used to develop operational customer retention and marketing strategies. Predictive, forward-looking CLV scores are most useful from a marketing standpoint.

Historical CLV

In auto dealerships, CLV scores are used to determine what benefits and level of treatment a customer receives. If you assign a CLV score to every customer and tag them in your CRM, your salespeople and service advisors will know at a glance whether they are dealing with a VIP.

Of course, this knowledge is never an excuse to treat someone poorly. But it’s useful to know what benefits you are willing and authorized to confer in order to keep a customer happy.

Similar to how airlines use status to confer benefits such as seat upgrades and priority check-in, dealers can use a high CLV status to offer benefits such as free loaner vehicles, preferential service appointment times or invitations to events.

In marketing, a rear-facing CLV score is used to identify customers that are vulnerable to defection, and to ramp up efforts to retain them. For example, if you have a customer with a high CLV who has not come in for service in 12 months, we’ll recommend spending more money and/or using more channels to reach these customers, and create targeted offers designed to keep them loyal.

Predictive CLV

The use of predictive CLV scores in marketing is still an emerging practice. We already recognize that even before someone becomes a customer, we can determine from their behavior whether or not they will be a valuable customer.

This allows dealers to focus more of their marketing resources on acquiring potential customers with high potential CLVs. After all, your real goal in marketing is not to win the most customers. Your goal is to win a disproportionate percentage of the most valuable customers.

This goal is achieved by customer modeling. First, you identify the top 20 percent of your customers and analyze the traits they share. In the car business, you’ll probably be looking at customers with multi-vehicle households, families with teenagers, and households in certain zip codes that indicate a degree of affluence.

It’s also helpful to gather data from third-party sources so you know what types of vehicles your customers previously owned, what their credit scores are and other purchases they have made recently.

Finally, you’ll need to know which media channels and types of offers your high CLV customers are most responsive to.

Once you have this data on your own customers, you can use it to create conquest lists of prospects in your primary market area that share similar traits. You’ll be able to reach and engage them with campaigns that are extremely targeted and tailored to their needs, greatly increasing marketing ROI.

Ignore the Grinders

Negative CLV can also be used to identify and ignore the “grinders.” You know the ones I’m talking about. These people go to 16 different stores searching for the absolute lowest price on a car. When they buy from you they never return for service.

Not only are the bottom 20 percent of your customers unprofitable, but they grind your salespeople down, waste their time and reduce their commissions.

Using the same methods of customer modeling, you can pretty much ignore these customers when it comes to your marketing efforts. Why waste your time and money? Also, if they are appropriate tagged in your CRM, your salespeople will have a heads up on how to treat them. That is, they shouldn’t waste their time and energy haggling with these people.

Ultimately, your goal is to weed the grinders out of your database and replace them with high CLV customers.

Assigning a CLV score to your customers is the first step in developing operational and marketing strategies designed to increase customer retention; not for every customer, but for the high-value customers that drive the most profits to your bottom line.