Customer lifetime value

Customer lifetime value: It’s relevance to your business

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Customer lifetime value: Marketers devote time , effort and all possible resources to track the journeys of their visitors from start to finish, improve content and provide the best possible customer experience.

Focusing on mostly fleeting outcomes however means you need to do more.

Organizations wishing to ensure long-term success include measuring the lifetime value of their customers in their strategy.

Customer lifetime value is a key criterion for knowing your customers.

It’s a prediction of the value your relationship with a customer can bring to your business, to be more precise.

This approach helps organizations demonstrate the future value their marketing initiatives can generate.

That’s why your investment evaluation should be based on long-term profits, rather than short-term wins.

Focusing on CLV means you can design an efficient strategy with more concise planning of the budget.

Your clients aren’t the same, in the sense that some bring more revenue than others.

So knowing which ones you should focus on first, and investing in, is crucial. And it is no secret that it is easier to keep a satisfied customer than to obtain one new.

Since you can’t be sure how long this relationship will last, you can estimate the relationship and state CLV as a daily value.

It can be set for different time frames, depending on your business, but it is usually fixed for a 12 or 24-month period.

Why should you calculate customer lifetime value

First of all, the customer retention is one of the key reasons for measuring CLV.

The statistics speak for themselves – as Marketing Analytics show, the likelihood of selling to a potential prospective consumer is 5 percent – 20 percent while the likelihood of selling to an current customer is 60 percent – 70 percent.

Selling more to repeat customers will bring considerably more profits. That also stresses the importance of fostering customer loyalty.

You need to dig a little deeper, once you know this golden rule.

When it comes to customer sales, cost of purchase, and other metrics, the customers, even new ones, aren’t comparable.

Thus you can better evaluate how much you should invest in retaining your current customers by measuring CLV.

It also helps your organization plan more expenses and split your budget between retention and acquisition.

Including lifetime value estimates for consumers in the plan helps identify realistic marketing targets along with selling strategies to reduce acquisition costs and keep retention high.

CLV gives you a deeper look into the performance of your company by taking into account a longer time period.

You can more accurately determine whether your current acquisition and retention strategy is built to score fast wins, or rather to support steady and sustainable progress.

Finally, CLV serves as a touchstone to further expand.

Lifetime value for the consumer offers you a wealth of valuable knowledge about your applications and customers. It lets you answer critical questions such as:

  • How much should I spend on customer acquisition?
  • How much will I spend to keep my customers or to win them back?
  • By how much time should my sales team spend acquiring customers?
  • How to calculate customer lifetime value

You now know that to help your organization grow, you must include CLV in your marketing arsenal.

Now it’s time to know the formula for estimating the worth of customer lifetime.

There are a variety of ways to do that, and depending on the resources you have, your preference. The trick is to pick and stick to one.

The simplest and most traditional one we will present to you. To measure CLV, you’ll need to consider things like:

  • Customer lifespan
  • Retention rate
  • Customer churn rate
  • Average profit margins (per customer)

 

Historic customer lifetime value

What is Historic CLV Essentially, it is the amount of all the gross income from previous sales by a consumer.

You need to add all the gross profit values up to the last transaction (N) that a consumer has made to measure it.

If you calculate CLV on a net profit basis, you can get the true benefit that a given client produces.

This includes costs relating to service, return, marketing, acquisition, etc.

The drawback is that to get the most up-to – date data, you might have to do some complicated maths at the individual level.

Even, CLV’s gross margin offers you a detailed understanding of the productivity of your customers to date.

This approach is true in theory if consumers have the same expectations and engage with your brand in the same manner for approximately the same time span.

Something you need to note, too, is that measuring historic CLV means bringing both the old and new customers into the same bowl.

That could be tricky, because behavior and preferences can vary. Client differences will affect CLV.

Predictive CLV

What, then, is behind the predictive CLV concept? Firstly, its objective is to model your customers’ transactional behaviors to predict what actions they will take in the future.

This method is a great customer lifetime value indicator, better than a historical CLV.

It works with algorithms which attempt to generate precise CLV while predicting the total value of a customer.

Predictive CLV is driven by a database of previous sales and actions taken by the consumer to better predict the value that a given customer will produce.

Keep in mind, however, that this approach has a flaw: it is a prediction that will not always be accurate at 100 per cent.

For increase accuracy, the CLV equations should be tailored to the particular industry in which you work.

Precision gives you a tool in your CLV to build sound and successful marketing strategies.

Traditional CLV

In some circumstances, relying on the more traditional, but in-depth, CLV formula is better. This could be the case, if your annual sales are not flat.

You can then take the discount rate into account, as well as include an average gross margin per customer lifespan and retention rate.

How do you apply CLV

After you have done CLV measurement, this knowledge can be used to chisel your strategies. Below are a few main cases where you can apply them.

Effectively segment your customers

You can greatly boost both profiling and segmentation with the implementation of CLV models.

This will help you produce more personalized deals and target clients based on their potential interest.

Segmentation improves conversion rates for forecasts and leads.

In addition, with data collected using technologies such as CDP or DMP, and analytics, you can increase the effectiveness of your segments.

Lift retention

The lifetime value of your customers is your guide for managing strategies to keep your customers loyal to their brand.

It also helps you set priorities, such as which clients to win back, and develop a unique strategy for that.

Increase loyalty

CLV can be used as a tool to enhance your operational capacities and increase customer satisfaction.

The more you are aware of your customers and their needs, the better offers you can deliver.

This helps maintain the relationship between your consumers and your brand lasting longer.

When it comes to e-commerce for example, you can promote special offers or some flash sales.

Enhance forecasting

Calculating the lifetime value of the customer allows you to predict the product or service needs for the future.

This way, you can manage your investment regardless of whether it is for workforce, inventory or other resources.

Effective forecasting is important for reducing productivity losses, as it enables more efficient allocation of resources.

Recognize best customers

Data on your customers , especially regular purchases and transactions, helps you to spot those who spend the most.

Making the most of this information allows you to further promote certain products.

You can also invite your clients to special events, and offer specially tailored deals for high-value clients.

Komolafe Timileyin is a passionate entrepreneur that loves to solve entrepreneurial issues. He is also a blogger and an upcoming Engineer.

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