As marketers, there’s almost nothing we love more than a good metric. We’re constantly crunching the numbers to find out what works, why it works, and how we can make it work more effectively. When it comes to marketing metrics, you might feel confident that you know all the heavy hitters—think sales growth, conversion rates, and customer engagement. But there’s one key metric that’s consistently overlooked: Customer Lifetime Value (CLV).
What Is CLV?
Customer Lifetime Value is a measurement of the net profit that can be attributed to one customer over the entire span of their relationship with your business. You might also see it abbreviated as LCV (Lifetime Customer Value) or LTV (Life-Time Value). For a quick-and-dirty estimation of CLV for your company, you can use this simple formula:
Average Annual Customer Profit x Average Duration of Customer Retention
As with most marketing metrics, you can dive far deeper into the numbers; here’s a closer look at CLV calculations from the Harvard Business Review. Before you break out the calculator, it’s important to understand why CLV is one of the most essential and under-appreciated metrics in a marketer’s arsenal.
Why Is It Essential to Understand CLV?
A 2018 study reported that only 24% of marketers thought their company monitored CLV effectively, and 69% were aware that improvements could be made. That means a robust understanding of CLV gives you a valuable edge as your business grows. Accurate CLV calculations can offer key insights into acquisition spend, segmentation, long-term customer profiles, ad performance, customer retention, and future growth potential for your company.
Most importantly, CLV is a fundamentally customer-centric metric that unifies data from every corner of your business to provide a broad view of customer interactions. The wealth of data that you’ll discover when calculating CLV paints a complete portrait of a customer’s journey with your company. When you improve your understanding of CLV, you’ll gain thought-provoking new insights on where, when, why, and how your customers make their purchases—which may in turn change your perspective on the business as a whole.
How can CLV data work harder for you? Read on for five key ways CLV analysis can benefit your business, plus a deeper dive into the challenges of understanding this often-overlooked metric.
5 Ways Your Business Can Use CLV
- Cut Down on Churn: Complex CLV models consider factors including the recency, frequency, and monetary value of every purchase made by a customer. A deeper understanding of metrics like Purchase Frequency and Average Order Value makes it easier to establish customer touch points at the right time with the right kind of message. These personalized interactions keep customers engaged with your brand, helping to cut down your churn rate. Bloom Intelligence reports that it costs five times more to acquire a new customer than it does to retain an existing one, so keeping churn low can seriously impact your bottom line.
- Target VIP Customers: CLV analysis can reveal a lot about your highest value customers, including how you acquired them and their average cost of acquisition. Armed with this knowledge, you can develop a plan for targeting even more VIPs. CLV data will help you identify the channels and strategies that lead to high value customers, as well as a reasonable cost of acquisition for those customers.
- Streamline Your Advertising Budget: By offering new insights into acquisition costs, CLV can also help you determine how to best spend your advertising dollars—and where you might be spending too much. Many metrics focus on customers who make a single, high-value purchase, even if they never come back to your business again. While these customers are certainly important, it’s the customers who shop with you again and again who actually create more value in exchange for your advertising dollars. CLV analysis that includes data on purchase patterns identifies which advertising techniques help you forge lasting customer relationships, so you can allocate your marketing dollars effectively.
- Segment Customers By Value: Once you’ve secured high value customers, CLV makes it easier to separate your customer base into tiers, with the goal of moving as many customers as possible into the high value range. VIP customers often provide a disproportionately large percentage of total revenue, so insights gained from CLV analysis help you keep those customer segments happy and convert entry-level customers into VIPs.
- Strengthen Your Weak Points: A key component of growth for any business is a clear-eyed understanding of where your weaknesses lie. As you unify your data and perform a CLV analysis, you’re likely to spot new weak points that were concealed by disjointed data silos in the past—and perhaps identify ways you can transform them into areas of opportunity.
Why Is CLV So Poorly Understood?
When it comes to calculating and using CLV effectively, corralling all the data you need is the biggest challenge—especially as your business grows. Scattered departments might have ownership of different information, stored in different programs, representing customers who interact with you on different platforms. All this adds up to a nightmare for marketers who want to understand CLV more clearly.
How can you solve this problem? Make a plan to unify your data. (This is where Clutch can help.) To calculate CLV more effectively, you’ll need a single, widely accessible dashboard that breaks customer data out of its silos and unifies it. Once that system is in place, you’ll also need qualified people to interpret the data and make an actionable plan based on what they find.
Now that you’ve taken a closer look at CLV, you’re ready to join the marketing experts who are making this key metric work harder for their businesses. Interested in learning how we can help you wrangle your data and take control of CLV? Talk to us.