Understanding Your Customer Lifetime Value

Do you know the lifetime value of your customers? CLV, CLTV, LCV, LTV? Do any of these ring a bell? Hint: They all mean the same thing – Customer Lifetime Value. We’ll use CLV for the remainder of this article.

Think of your average customer like an asset to your business. Guess what? Today is your lucky today. Today, Nichole Smith has become your newest customer. Nichole is your organization’s newest asset. What is Nichole worth to your organization? There are many advanced algorithms and formulas used to calculate CLV, but let’s just think about the basics for now:

  1. How much net profit will you derive from Nichole today from her initial purchase or engagement?
  2. How long is Nichole going to be your customer?
  3. How much net profit will you derive from Nichole throughout her entire life as your customer?

That (#3) is a very rough idea of your CLV. If you want to get fancy you should also consider that profit you receive today is more valuable than profit you’re going to receive 5 years from now. You can discount future profits using a simple multiplier based on how far out that profit is if you want a more accurate number. Wikipedia actually has a decent article on CLV that goes into much more detail than I will here.

So why is your CLV so important?

It’s amazing how many organizations are executing multi-million dollar marketing campaigns without understanding their CLV, even at it’s most basic level. Your CLV is the absolute most you should pay to acquire a new customer. Your marketing agencies should be well aware of your CLV and consistently working to decrease your customer acquisition costs and increase your overall ROI.

Although not ideal, it’s not uncommon in competitive industries to find that successful paid search campaigns show a negative ROI on initial purchases and engagements. Nobody wants to pay $100 to make a $50 sale that only shows a $15 profit. If you understand that your average customer will place 20 orders totaling $50 on average, each with a $15 profit over a 5 year period you’d still be showing a $200 profit on that customer. Would you like a lower cost per acquisition? Certainly! What’s important is that you understand your CLV (even at a very basic level) and ensure your efforts result in customer acquisition costs that do not exceed it.

Customer Referrals: It gets better!

Something a lot of companies don’t consider when calculating their CLV are referrals. Given our example above, how many new customers do you think Nichole will refer to your company over her lifetime? How much revenue and profit will those referrals produce? What’s their CLV? The good news is you likely won’t incur large marketing expenses to generate referrals from your existing customers. If your average customer refers 2 new customers over their lifetime your customer acquisition costs decrease and ROI increase dramatically!

But Wait! There’s More! Up-Selling & Marketing To Your Existing Customers

Let’s pretend for a moment that your average customer will purchase from or engage with your organization for 5 years and have a CLV of $300. We can assume Nichole is likely to do the same. What opportunities will you have over those next 5 years to market to Nichole and up-sell her on additional products and services? Sure, there is a cost associated with marketing to your existing customers. Likely, though, it’s very minimal. Do we think we can entice Nichole to purchase additional products or services? This is where it gets really fun. Your existing customers are much easier to market to and much more likely to purchase or engage more if you’re doing your job. How much can you increase your CLV by marketing to your existing customers over their lifespan?

So What Next?

Think about your company. Do you have accurate customer data tagged with proper referral sources for the past? If so, you may be able to export some data and reports that can be organized and summarized manually or in Excel that will give you a rough idea of your CLV.

Are you lacking accurate, thorough customer data? Maybe you’re a startup? Calculating your CLV is a bit more challenging. You can think about the type of customers you plan to attract, how long they’ll remain customers and how much profit they may generate. This is a bit scary, though, as it’s all just a guess. I’d recommend staying very conservative if you’re in this situation. Something else you may have to consider is making an investment in learning your CLV and your  customer’s behaviors and tendencies. The more you have to invest the longer runway you’ll have to analyze your customer’s order and engagement behavior. Over time you’ll be able to re-calculate your CLV using the latest data and revise and optimize your marketing initiatives accordingly.

In either scenario, it certainly wouldn’t hurt to consult with your accounting/financial team or accountant to help you calculate your CLV. That is an investment you will not regret!

Part 1 of ….?!

This article is the first of a multi-part series dedicated to uncovering why most digital marketing campaigns fail. Be sure to check back in the coming weeks as we release subsequent parts of this series!

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