5 Things You Should Know About Customer Lifetime Value

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Quick question. What’s more important to you?

One sale. Or 50?

Obviously, that was rhetorical because we all know how a profitable business works.

The thing is, we’ve often found that our clients struggle to see beyond the value of quick sales. We get it. Investing in the future, which is always uncertain, can take a lot of trust.
Also, it costs a lot more today to acquire new customers than it ever did before.

And the profit you get from that acquisition is smaller than ever before.

To make matters worse, the process of gathering the information needed to find your Customer Lifetime Value (prediction of the net profit attributed to the entire future relationship with a customer) can be time-consuming, expensive…overwhelming.

But the truth is, Customer Lifetime Value (CLV) is the single most important metric for understanding your customer.

Why?

Harvard Business Review says it best: “Rather than thinking about how you can acquire a lot of customers and how cheaply you can do so, CLV helps you think about how to optimise your acquisition spending for maximum value rather than minimum cost.”

Simply put, it’s about you getting the most out of your marketing spend. Namely, long-term, loyal customers, who continually purchase your products or services over the foreseeable future.

#1 Let’s start with some quick facts

CLV/CLTV: customer lifetime value
LCV: lifetime customer value
LTV: life-time value
CP: customer profitability

• CLV is a prediction.
• It can be calculated historically, over specific time periods, or it can be predictive.
• You can have a very accurate or more ball-park figure, depending on your budget and time constraints.
• It’s best to use CLV to create awareness of how much you should be spending on customer retention.
• CLV is important because you can know how valuable a customer can be to you over a period of time.
• Improving your Customer Lifetime Value can have a dramatic impact throughout your business.

#2 Yes, CLV is intimidating to figure out.

Why? Well, for an accurate calculation you’ll need database queries, excel macros, statistical languages and more. But don’t worry about all that now. Here’s a breakdown of how to work out CLV once you’ve done the data digging:

Whats’ the average value of a sale for your business? For this example we’ll say, R50.

Let’s say it costs you R15 to acquire a new customer.

Now, we already know that there’s a 10% chance for repeat purchases. So, the total revenue you’d get from each customer is:
R50/ (1 – 0.1) = R55,56.
Minus the acquisition cost and you get R40,56 (your CLV)

Life time value

Still not sure how this all works? kissmetrics.com has a great case study on Starbucks. Click the image to see the full version. https://blog.kissmetrics.com/how-to-calculate-lifetime-value/?wide=1

 

 
 
 

#3 But wait, there’s more…

It’s not enough to just have the CLV number. You’ll need to be ruthlessly proactive and use it as a tool. For example:

Value Tier ApproachTake a value-tier approach – if you know that the top 5% of your customers contribute 35% of your revenue, you can focus your retention efforts on that group. You can also work on shifting customers up to the top tier too.

Gather insights on advertising – look at what digital ads are driving more than one sale from the same customer. That’s your sweet spot.

 

Use data to become predictive – know what products are most popular, personalise your communications to improve retention. The world is your oyster when you use analytics and customer spending insights.

It’s all about creating customer-centric concepts. When you use your CLV as a driver to foster better value-creating activity, you’ll see incredible results.

#4 Some innovative thinking?

What makes a customer truly valuable over time?
The trend is to invest in human capital and the capabilities of your customer. As opposed to looking at your budget and thinking; “ Whats’ the cheapest way I can get these guys to buy my stuff?”

Look at the likes of Amazon, Apple, Facebook…Netflix. They take the CLV very seriously. Using it to ensure they’re investing in their customer’s lifetime value, not just driving sales.

Author and MIT researcher, Michael Schrage, recommends having a brainstorming session where you ask employees to finish this sentence; ”Our customers become much more valuable when…”

While there are no right and wrong answers, here are some examples that you should sit with, during your sessions:

Our customers become much more valuable when…

they give us good ideas
they evangelise for us on social media
they reduce our costs
they collaborate with us
they try our new products
they introduce us to their customers
they share their data with us

You can take this exercise even further and ask; “Our best customers become much more valuable when…” and “Our typical customers become much more valuable when…”

#5 Final Thoughts

All roads seem to lead to data-driven company culture at the moment. And CLV is no exception. We consistently see clients embrace the metrics and analytics movement and as a result, turbo charge their marketing decisions. Not to mention, ushering in powerful and profitable transformations in their business dealings.

Yes, acquiring CLV data is time-consuming. But given the current climate of Big Data, CRM platforms and martech innovation, the process is a lot easier. We should know. ROI, metrics, and data are in our blood.

Considering taking the measured approach to your marketing activities? Contact us to find out how we can help you.

 

Resources we recommend:

 https://blog.kissmetrics.com/how-to-calculate-lifetime-value/

 https://www.smartinsights.com/guides/lifetime-value-spreadsheet/

 http://blog.bronto.com/commercemarketing/customer-lifetime-value-key-sustainable-growth/

 http://www.customerlifetimevalue.co/

 https://hbr.org/2017/04/what-most-companies-miss-about-customer-lifetime-value