Published On: Tue, May 22nd, 2018

Importance of Customer Lifetime Value in Marketing

If you are involved in any e-commerce business, you have at least heard the term Customer Lifetime Value (CLV). It is one of the crucial metrics to determine the growth and success of your company. And a constant presence in any business analysis.

Customer lifetime value simply tells you how much does a customer bring in to your revenue. It is used to calculate your potential growth and the ultimate value of your brand. Having the right idea about the net worth of every customer during a period of time is essential to develop your business further and further.

photo/ Muhammad Ribkhan

Customer lifetime value and customer retention

Easy CLV calculations let you know how much to invest in keeping a single customer. For example, let’s say that customer X has a CLV of $15K. If you spent $2K a year to retain this customer, and another $3K to acquire them, you can expect a profitable relationship with them for the next 5 years. Anything above will be a breaking even or losing money.

Understanding of this metric lets you plan ahead and invest in customer retention in the most profitable way. With Customer lifetime value, you can track your most valuable clients. Afterward, your marketing and sales team can focus mainly on them.

Most of your customers add up to a group of ~60% active profitable customers. Then, we have inactive (non-profitable) 20% of customers, and 20% very active, very profitable customers. Imagine this as a hill with two slopes. Your main interest lies with the right slope – the loyal, active, long-term customers.

Evaluating Customer lifetime value for better customer retention

There are countless ways to calculate customer lifetime value. The simplest one includes three essential variables – average order value (AOV), purchase frequency, and customer lifetime length. We will describe each of them briefly below.

  • Average order value – this metric shows how much money (on average) your customer spends when placing an order. You can determine this number by dividing the total revenue over a set period of time by the number of weeks/months analyzed.
  • Purchase frequency – as you may have guessed, this one represents how often a customer buys something from your store. Simply take the total count of purchases for a period of time and divide it by the total count of customers in the period.
  • Customer lifetime length – every customer has an expected lifetime length with your brand. If you have unlimited supplies, this value will be difficult to calculate. However, if your company sells specific items (diapers, children’s clothes, exotic cars), you can determine the CLL more easily.

If your business is new, you can use the average expectancy of customer lifetime length – it is about three years.

After all the calculations, you multiply the three metrics, and you get the average expected customer lifetime value. A properly calculated CLV lets you invest in a sensible and safer way. You will determine how much do you want to spend on acquisition and customer retention in the most efficient way.

The crucial role of Customer lifetime value in retention marketing

Calculating customer lifetime value offers various benefits to your business. With the proper tools, you can define the future of your company and determine how successful are your marketing campaigns.

  • CLV plays the role of a benchmark for expected growth and possible expansion. Knowing exactly how much you will earn lets you spend wisely. Simple, indeed. Profitable – Yes.
  • Properly calculated CLV tells you if you need to seek outside funding, get a loan, or even sell your company. Don’t be afraid to face the numbers. It will help you in the long run. Every business should know its value on the market.
  • Maybe the most important benefit comes in the face of your loyal customers. Customer lifetime value shows which customer is a valuable asset to your business. You can safely invest more in customer retention towards them.

If we look at the bigger picture, customer lifetime value illustrates the importance of repeat business. You can change and adapt your marketing priorities according to CLV calculations. Yes, it is nice to have a large base of new customers. But it is better to retain existing one. It is 5-10 times cheaper to do so, too.

The main percentage of your future revenue comes from as much as 20% of your customers. The core of loyal clients is key for growing businesses. The cost you less and less with each year, but bring more to the table with each purchase.

At the starting line, CLV doesn’t seem like a must metric. With time, you will understand how important it becomes. Knowing the value of a business, in the long run, is crucial for success in the era of constant competition.

What to focus on with Customer lifetime value?

We will write down the most effective approaches to your brand, using CLV. It is satisfying to see high CLV, especially on a bigger percentage of your customers. But you have to put this data to work after all, right?

  • Acquisition of new customers – if you manage to calculate an expected CLV before acquiring any new customer, you will avoid unpleasant surprises in the future. With this in mind, you will invest more accurate in customer acquisition.
  • Advertising and Marketing – Customer lifetime value shines when we speak of customer retention campaigns. Knowing your most profitable customer segments lets you emphasize on them. They bring in the biggest profits to your company, so treat them accordingly.
  • Return on investment (ROI) –  even with limited resources, you can earn great profits. The key here is wise investments. With CLV, you can indicate your strong sides and push them to the limit.
  • Management strategies – CLV has an impact on the important decisions in a business. You can use the data to provoke long-term customer satisfaction, rather than just short-term sales. A loyal customer is worth more than a dozen of one-time purchasers.
  • Customer retention – Spending on customer retention may be a tricky calculation. With customer lifetime value, you can measure how much to spend on keeping a customer with utmost accuracy. A loyal customer base will get you a long way.

This article has been written with some help from the lovely guys from Metrilo a really cool customer retention platform.

Author: Pankaj Deb

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