What is Customer Lifetime Value (CLV)?
Customer lifetime value, often referred to as either lifetime customer value (LCV), or life-time value (LTV) is a useful prediction of the profits your business can earn during the entire future relationship with a customer or client. There are crude ways to quickly calculate a rough estimated CLV, and there are also advanced techniques. Be sure not to get Customer Probability mixed up with CLV, even though they’re both important metrics. Calculating CP involves looking through and calculating past reports, while calculating customer lifetime value involes forecasting future activity.
Many marketers and companies focus only on the potential profit of an initial transaction. While this is not a bad thing (it’s always nice to have campaigns generating net profits up front), they may be leaving money on the table. Breaking even on a campaign while growing a qualified list of leads is still a massive win, assuming you can generate more sales from the leads in the future. Without knowing your CLV, it’s easy to view any campaign that fails to turn an immediate profit as a loser. However, though you might be losing out up front,
you can often more than make up for it as you nurture and grow your relationship with each client or customer (this is similar to a loss leader).
Why is Customer Lifetime Value Important?
Customer Lifetime Value is an important metric when it comes to your business. With an accurate CLV, you can figure out how much you can afford to spend to acquire new clients and customers. Even better, once you know your customer lifetime value, you can start working to increase it. The higher the CLV, the more advantage you have over competitors with smaller customer lifetime value… you can outspend them and still walk away more profitable.
When you factor in CLV as you create, track and optimize campaigns, your perspective will shift. You will start worrying less about instant profits, and focus more on the long-term profits you’ll be able to generate from your newly acquired clients and customers. You’ll be able to spend more and make less up front, knowing that you can reap massive rewards as you grow your relationship with your new customers.
How Do I Calculate Customer Lifetime Value?
There are two forms of CLV, Historical & Predicted. Historical CLV is similar to Customer Probability (CP) in that it utilizes past data to calculate an average CLV. Predicted CLV is looking towards the future at realistic estimates of all future revenue generated from a customer, while factoring in the costs it takes to acquire and nurture the relationship with them.
Calculating Historical CLV
Calculating historical CLV is relatively easy in theory (in most cases). You simply add all of the gross profit from all historic purchases for an individual customer. To be continued…
Calculating Predicted CLV
Once you have your customer lifetime value calculated and you’ve created a customer avatar, you’re ready to go out and craft marketing campaigns that factor in not only things such as what message to use, where to advertise, etc., but also how much you can afford to spend.
Before you can maximize customer lifetime value, you must know what your current CLV is.