How much is your customer worth? If you don’t know how much she spends during all her relationship with a brand, it’s hard to find a waypoint for your marketing actions. How will you measure the effectiveness of a campaign? It’s defined not only by profit from a single purchase! How will you assess attracting new customers who will buy several times? That’s where Customer Lifetime Value comes to the rescue.
If you have not calculated your CLV, find out first why you should do it.
Why to Calculate Customer Lifetime Value?
There are 6 reasons:
– You will gain a different perspective. Marketers get fixated on monthly and quarterly targets, and in consequence they lose what determines their success from their sight. Namely, long-term relationships with customers.
– Often the cost of an acquisition exceeds the profit from the first purchase and even the value of the cart, but it’s still profitable if we consider the whole relationship with the customer. CLV helps you see and describe it.
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– Calculating long-term customer value allows you to immunize yourself to seasonal marketing hypes and conventional wisdom.
– With the knowledge provided by CLV easier, it will be to optimize the work of the department and resources.
– CLV should grow: calculate the present one to monitor the development of the company. It becomes the starting point for action.
– Inability to calculate the relationship between the cost of customer acquisition and the long-term revenue is the most common cause of failure of new businesses (as David Skok argues). Often it turns out that our business model doesn’t make any economic sense – and CLV is an important criterion that allows to calculate it.
What data do you need to calculate the Customer Lifetime Value?
We have 2 types of data that should be considered:
1. Variable:
– the value of the basket
– the amount of purchases per unit of time (e.g., monthly)
– customer value per unit time.
These values are averaged with all of our customers.
2. Stable:
– The Customer Average Lifespan
– retention rate: the percentage of clients who within a given unit of time will shop again
– margin per customer (calculated or the accepted unit of time, or throughout the period of customer relationship).
(Infographic by KISSmetrics illustrates the problem).
Methods of calculating the Customer Lifetime Value
The simplest way to calculate the CLV is to estimate how much a client will buy from us in a lifetime. For example, if she makes 2 purchases per month, each of an average value of $30, and shops regularly for 5 years, then we multiply the numbers:
5 (years) x 12 (months) x 2 (purchases per month) x 30 (value of an average basket) = $13 800.
The second mode of calculating takes into account the average value of the basket ($30 again), number of visits per unit of time (2 / month) and profit margin per customer (let’s say – 15%).
Now we want to know how much gain during the entire relationship: multiply so 5 (years) x 12 (number of months in the year) x 2 (number of visits per month) x 30 (value of the basket) x 0.15 (margin) = $540.
Berger and Nasr (Customer Lifetime Value: Marketing Models and Applications, “Journal of Interactive Marketing,” Winter 1998) propose a simpler scheme: customer value is the difference between the value generated by the client revenue and costs of sales, service and customer acquisition.
CLV calculation models always raise controversies (read more in an article on the Conversion XL blog) and can be very complicated. On the web, you can find many calculators that count CLV for you, for example, Customer Lifetime Value.
The calculation of CLV for segments
You can get useful information from calculating the CLV for customers from different groups, notes Alex McEachern. Divide your base:
– according to the channel acquisition: Maybe your clients from Facebook spend much less when compared to others?
– depending on the actions they undertake take: for example to customers a loyalty program buy more?
Increasing CLV
Increasing long-term customer value allows you to multiply profits: marketers often focus on growing the number of customers, and yet you can earn more from those who you already have.
Achieve that with:
– Personalized e-mail campaigns, like upselling, cross-selling using Marketing Automation
– Building the habit, for example with emails or notifications to remind of the need to renew the subscription, re-provisioning or additional purchases,
– Comfortable and practical loyalty programs,
– Building relationships by donating voice customers, listening to their opinions, creating opportunities for dialogue and responses to their attention.
Long-term customer value is one of the most important metrics that must be taken into account marketer. It will allow you to work on maintaining relationships and increase revenue.
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