Customer Lifetime Value: Understanding and Making the Case for It
January 20, 2019
Marketers often lament the dwindling of attention spans in today’s society. Driving meaningful engagement grows all the more difficult when people are conditioned to quickly move on from one thing to the next, rather than spending enough time with content (or products, or conversations, etc.) to see the real value.
But are we guilty of the same thing when it comes to measuring and assessing customer value? Does an overemphasis on new customer acquisition reflect the same kind of short-term mindset that we’re trying to conquer?
Granted, the motivations in each case differ. As consumers, we might be driven by a desire for instant gratification, the urge to stay on top of popular trends, or the fear of missing out. As marketers, we are usually hyper-focused on customer acquisition because our companies expect us to keep the pipeline filled. But who’s to say we can’t accomplish that goal by shifting our resources and focus to existing customers?
By helping them succeed, we can increase their satisfaction, encourage their loyalty, and drive additional purchases that ultimately boost customer lifetime value (CLV).
What is Customer Lifetime Value?
In the grand scheme of all marketing measurement, some would argue CLV is the ultimate ROI metric. After all, it helps you gauge how much value (i.e., revenue) your company can potentially realize over the course of its relationship with each customer. CLV is about shifting your perspective from the short-term to the long-term.
Having this knowledge equips you to more confidently decide how much you should spend to acquire and retain that customer in order to make it a profitable relationship. Simply put: you want to keep your investment in acquisition and retention lower than the amount the customer will end up spending with your company. Obviously the lower you can keep your costs, the higher the profit.
How to Calculate Customer Lifetime Value
To figure out which customers are potentially the most profitable, you calculate the CLV. For subscription-based services, multiply: [Average Length of a Subscription x Monthly Cost of the Subscription]
For products and services you’ve been selling for some time, you can come up with averages: [Average Monthly Revenue Per Customer x Average # of Months a Customer Stays With Your Company]
KISSmetrics produced an infographic explaining how to calculate lifetime value for less predictable services, sharing three common CLV equations. Another option is using this interactive calculator presented in a Harvard Business Review article.
Remember: Not all customers are created equal. By calculating CLV, you can zero in on the highest-value customers, focusing your efforts – and allocating your budget – accordingly.
How to Increase Customer Lifetime Value
In most cases, your highest costs come at the start of the relationship with a customer. Think about all the investments across different departments for customer acquisition. In addition to marketing, your sales, legal, billing, and sometimes even engineering and business development departments are involved in closing a deal and signing on a new customer. The costs for all those resources add up to a total acquisition cost.
The first way to increase CLV is by keeping those initial costs low, through methods such as automation, streamlined processes, and even self-service where it makes sense. Beyond that, you increase CLV by nurturing customer relationships to keep them strong for as long as possible while encouraging follow-up purchases. Typically you’ll realize higher profit margins with each passing year since the high initial acquisition cost is no longer part of the equation.
Making the Case for Customer Lifetime Value
Maybe you’re all in on CLV but need to convince your boss to get on board. Other than underscoring the profitability angle, another convincing argument is the growing emphasis on customer retention (think the rise of the Net Promoter Score). It’s a proven fact that retaining customers pays off. Businesses see more value by nurturing relationships with profitable customers rather than spending more money to bring on new – and, as yet, untested – customers.
Understandably, the long-term perspective of CLV is often at odds with the short-term goals of marketing leaders who need to show value ASAP in order to keep the budget coming. But if you’re doing all the right things, you will quickly find that measuring customer lifetime value better reflects the true impact of your marketing activities, and validates the importance of great brand experiences.
Build up enough momentum with these efforts and it won’t be hard to make the case that the measurement strategy is a winning one that will pay off big over time. Counterbalance this with the lost costs associated with opportunities that never convert, and the data will support the case for retention and its relative ROI.
Remember, if you adjust your perspective as a marketer and avoid the “shiny new object” mindset with acquisition, your customers will be more likely to do the same.
For a deeper dive into understanding and calculating the metrics that matter, download our guide, Solving for Marketing ROI.