Investment Management Certificate (IMC) Practice Exam

How can Lou increase the lifetime value of his customers?

1. Decrease the retention rate

2. Increase marketing communications expenditures

3. Increase the referral rate

4. Increase the discount rate

The correct answer is: Increase the referral rate

To enhance the lifetime value of customers, a key strategy is increasing the referral rate. When existing customers refer new clients, not only does this lead to the acquisition of new customers at a lower cost compared to traditional marketing efforts, but it also tends to bring in clients who are more likely to trust the business based on a referral from a friend or family member. This relationship often results in higher initial spending and better retention rates. Additionally, referrals can foster a loyal customer base since they originate from satisfied clients who have had positive experiences. The cycle continues as new customers, who come through referrals, are likely to refer even more customers, thereby compounding the benefits. This organic growth mechanism is vital for increasing overall customer lifetime value, as it enhances both the number of customers and the duration over which they remain active patrons of the business. Increasing marketing communications expenditures may improve visibility and attract new customers, but it doesn’t necessarily establish the trust implicit in referrals. Decreasing the retention rate would have a detrimental effect on customer value, while increasing the discount rate could erode profitability and undermine the perceived value of products or services. Therefore, focusing on referrals is a more effective and sustainable strategy for increasing lifetime value.