One of the most important questions you can ask as a marketer is, “How are my campaigns working?” Your answer to that question starts with your definition of “working.” What does it look like when your campaigns work? What metrics matter to your business? What kind of impact do you need to have on those metrics? And what does your customer journey to purchase (and beyond), look like? One of the best ways to answer those questions and the others that come up along the way is by tracking and analyzing your customer lifetime value (CLV).
This valuable metric helps you to look at everything you do from a longer-term perspective than only tracking the initial purchase that a customer makes. You’re able to make more investments into the initiatives that are making a difference in a customer’s willingness to purchase.
Getting an accurate measure of CLV takes an in-depth analysis of your customers’ overall behavior before, during, and after the initial purchase. By the end of this article, you should have a better understanding of how to do this analysis and be able to answer the following questions:
- What is customer lifetime value?
- How do you calculate customer lifetime value?
- How should I use customer lifetime value to make decisions and analyze my marketing efforts?
- How can I optimize customer lifetime value?
What Is Customer Lifetime Value?
In basic terms, CLV is the general measure of the projected revenue that a customer will bring in over their lifespan as a customer. You can use your customer data to find an overall, average CLV for all of your customers, an individual customer-level CLV or a CLV for a certain type of customer. You can then use this to make decisions about budget, tactics and strategies, and more. It’s only one piece of your marketing analytics equation, but it’s a sizeable piece that deserves consideration in just about any situation.
CLV is a general term that encompasses a few different metrics, all of which are important in different instances. The different types are:
- CLV per customer
- CLV for a specific customer profile or marketing campaign
- Overall CLV
CLV per customer
At the most granular level, you can determine CLV for each individual customer. This allows you to see how different efforts impact different customers. Tracking this number also allows you to pull together data that begins to form patterns as you separate your customers into types and profiles, or as you test various acquisition and nurture campaigns.
CLV for a customer profile or marketing campaign
If you have a basic customer profile for each customer and a CLV per customer, you can begin to see patterns emerge for various customer profiles. You might notice that the people who spend the most with you are between the ages of 25 and 35, and enjoy hiking. This might lead you to see how you could further connect with customers who fit this profile. You could also see how various marketing efforts impact CLV. For instance, you might notice that customers referred by other customers are more likely to be less expensive to acquire and more likely to purchase on a continued basis.
This is an average of all of your customers’ lifetime values. It can help you determine how much, on average, you should spend per customer when you’re working to acquire and nurture customers.
Each of these is slightly different in its uses, but all of them work toward the same goal – to help you better understand your customers, their behavior, and your marketing campaigns.
As you can tell, this article is obviously very pro-CLV. However, we will admit that it does have its drawbacks. In the spirit of giving you all the information you need to make the right decision for your organization, we’ll go through some pros and cons.
The main idea with CLV is that it gives you the ability to think about your customers throughout their lifetime. It gets you oriented toward making reasonable, data-focused investments into acquiring customers and then nurturing and retaining customers for maximum value. This long-term perspective will save you time and money and lead you toward a more sustainable approach to growth.
Even just the process of determining your CLV makes you answer questions like: How many times and how often do customers come back? What are some indicators that a customer will purchase again, more frequently, or spend more? Which marketing acquisition efforts lead to higher-value customers? Which nurturing efforts encourage customers to return, spend more, or refer other customers?
The answers to those questions alone are valuable pieces of information that help you further identify a more efficient strategy. You can take this even further when you’ve identified even a general CLV. More than anything, this number tells you exactly how much you can afford to spend on a new customer, invaluable information for anyone who is investing in any demand generation activities. You can even determine CLV per customer.
No single metric is perfect, and CLV is no exception. CLV's main drawback is that the future is difficult to predict, even with the best data at your disposal. You never know exactly what your customers will do or what forces out of your control will impact their behavior. As such, CLV is only a best guess and shouldn't be seen as an exact source of truth.
The other major drawback is that it requires a decent-sized investment of time, coordination, and organizational alignment to determine and continue to analyze your CLV in most cases. Some organizations that have a good handle on their customer data will have no problem coming up with a number. However, those who have a combination of online and in-store purchases, who have a long path to purchase or an extended time between purchases, may struggle to string together the pieces of data needed to come up with a meaningful, ongoing calculation of CLV.
Finally, many things impact CLV and not all of them are controlled by marketing strategies. For example, a customer could be intrigued by the marketing campaign, they might enjoy the product, but they might have a poor customer service experience that leads them to leave and not come back. You can picture any number of variables that might come into play. It can be challenging to determine precisely which interactions with a brand, from marketing to product to customer support and more, are actually impacting a customer’s ability and desire to continue spending.
So, while CLV is a vital piece of information to have, it shouldn’t be the only data point that you use to judge your success. If you’re still on Team CLV and want to learn how to calculate it, which decisions it’s useful for, how to optimize it and which metrics to combine it with for ultimate success, keep reading.
How Do You Calculate CLV?
While CLV isn’t the easiest equation, it’s definitely doable if you have some basic data. We’ll break it down into a few easy to understand steps. Consider this your handy CLV recipe, empowering you to cook up some marketing magic.
Here’s what you’ll need to get started:
- Total yearly revenue
- Total yearly unique purchases
- Total unique customers who made purchases
- Average number of years a person continues to purchase from you
How Should I Use CLV to Make Decisions and Analyze My Marketing Efforts?
It’s not often that one metric can be the guidepost for so many different situations that impact your overall success. CLV is definitely in that category and can be used to help you make decisions about every phase of your customers’ journey.
Here are some places where CLV is key:
- Determining how much you can and should spend to acquire new customers.
- Deciding how much time you can spend serving customers
- Analyzing which activities positively or negatively impact your ability to retain customers
- Looking at ways to implement retention or nurturing efforts
Determining how much to spend and where to spend it
CLV gives you a concrete value that can guide your demand generation or lifecycle marketing efforts. It even further guides your efforts when you narrow it down to specific key profiles that are more, or less, valuable to you. One caveat, just because a customer is currently less valuable to you, doesn’t mean they should be discounted entirely. It could be that they become more valuable later on, they are experiencing some friction in the process, or they require certain nurturing efforts that you don’t currently have in place.
Analyzing which activities impact your ability to retain customers
This is particularly helpful when you can track which customers receive which messages and on which channels. You can see how their purchase behavior changes when they are, for instance, receiving weekly email newsletters or if they come in through Instagram versus Google Search. You might notice that some channels bring a significant number of visitors to your website, but not as many high-value customers. Either way, the insights tracking and analyzing CLV brings will get you closer to your overall customer journey and help you implement more effective campaigns based.
Looking at ways to implement retention and nurturing efforts
Once you have some insight into your overall CLV, CLV for individual customer profiles, and CLV for each customer, you will be well placed to notice trends in your customer journey. You might notice that people are most likely to drop off and not come back after their first purchase, but if you can bring them back for a second, they're more likely to stay for a longer period. That might lead you to focus your retention efforts on customers after their first purchase. Or, you might notice that people who purchase a particular product first are more likely to buy another one second. You could also implement nurturing efforts that help you retain customers like emails, retargeting, and more and watch how they impact your CLV.
How Can I Optimize Customer Lifetime Value?
By now, you’ve probably noticed that CLV relies on a wide variety of factors — the main reason it can be complicated to calculate in the first place. However, this also means that you have quite a few levers that you can pull to improve and optimize your CLV for better results.
The most obvious way to increase CLV is to increase customer retention. According to a recent study by Bain and Company, just a 5% increase in customer retention can increase profits anywhere from 25%-95%.
Here are just a few ways you can increase CLV by retaining customers longer and increasing purchase value, but the opportunities are endless:
- Email, including cart abandonment, post-purchase, newsletters and more
- Personalized experiences
- Customer satisfaction
59% of respondents in a recent survey say that marketing emails influence their purchase decisions. Not only that, but 80% of business professionals believe that email marketing increases customer retention. Email can be used to encourage return after cart abandonment, create awareness of new product offerings or promotions, distribute helpful content relating to your brand, and more. The key with email is to make sure your emails provide value beyond merely giving product updates. Your emails to your customers are a valuable opportunity to nurture a relationship and as such, should be engaging, interesting, and helpful to your customer.
Make sure you stay top of mind with customers who have visited your site, completed a purchase, or otherwise indicated some interest in your brand. You can encourage them to come back and purchase again and let them know about new products that complement the ones they’ve already purchased.
Did you know that 51% of customers expect that brands will anticipate their needs and make relevant suggestions before they make contact? In addition, 88% of US marketers reported seeing measurable improvements due to personalization. Personalize your advertising by choosing highly-targeted segments with creative that speaks to their individual characteristics. Take it one step further by personalizing your website based on visitors’ previous interactions with you.
It follows that if your customers are satisfied with their experience with your brand, they will probably come back. Each interaction you have with a customer can be the difference between that customer returning and referring and that customer leaving. Identify points of friction for your customers, whether that’s the purchase process, customer support, etc. and work to resolve as many of them as possible. It is also beneficial to actively solicit feedback from your clients to find out what you’re doing well and what you can improve.
Long-Term > Short-Term
Customer lifetime value is one of the most important pieces of information that you can calculate as a business. If used in the right way, you can unlock new potential for increased revenue, return on investment (ROI), and decreased cost per acquisition (CPA). You can concretely answer the question “How are my campaigns working?” and analyze the ways to optimize for better results.
Delve deeper into why customer lifetime values matter here.
Last updated on November 14th, 2022.