Customer Lifetime Value (CLV) is one of those buzz terms that may make you say, “Huh?” But, it doesn’t have to be. Seemingly, everywhere we turn, the term ROI (return on investment) is discussed. In this digital age, these analytics and calculations are much more accessible than they have ever been. Almost everything can be […]
Customer Lifetime Value (CLV) is one of those buzz terms that may make you say, “Huh?” But, it doesn’t have to be. Seemingly, everywhere we turn, the term ROI (return on investment) is discussed. In this digital age, these analytics and calculations are much more accessible than they have ever been. Almost everything can be measured.
CLV is one of the most important measurement tools you will ever use, and while it seems scary, it really is easy. In basic terms, it determines which marketing channels deliver the most valuable customers, and it takes the guesswork out of the allocation of your marketing dollars. CLV actually gives you a justification for going back to the “corporate penny pinchers” and asking for more money to do another marketing campaign.
It’s very easy for us to consider a marketing campaign an immediate success or failure. How many times have we heard (or said), “We didn’t get anything from that campaign, I have not had one customer tell me they saw it,” or “We had 25 potential customers call after we sent out that postcard, what a success.” If the latter happens, everyone claps and high fives, and it is never talked about again.
Now we can truly know the value of what did or did not result from our campaigns six months, a year, or three years after the campaign is complete.
CLV has great appeal as a marketing concept and tool, because, in theory, it represents exactly how much each customer is worth in dollars and exactly how much a company should be willing to spend to acquire each customer. This works especially well in direct-marketing efforts. It is a complement to existing marketing research and does not replace your target-marketing initiatives. It just shows you how to target that market more effectively.
It will show you the most-effective technique and how much to invest in good customers. Increasing your customer satisfaction will boost your CLV, and in the end be worth the efforts. This calculation will help you make informed prospecting decisions and make that dreaded budget conversation with your president and/or
CFO much easier when you can show them the hard numbers.
CLV acts as kind of a GPS for your marketing plan. It can tell us where not to go because it does not work, versus where to go because that has proven to work in the past.
Calculating CLV
Don’t be scared off by the math for your CLV calculation. Here is a simple formula:
- Average value of a sale (multiplied by) Number of repeat transactions (times) Average retention time in months or years for a typical customer.
A simple example would be the lifetime value of a customer who spends $200 every month for three years. The value of that customer would be:
- $200 X 12 months X 3 years = $7,200 in total revenue (or $2,400 per year)
Marketing doesn’t just have to be about branding anymore and shouldn’t be hard to measure. You can tie it naturally into sales numbers making your campaign a sales AND marketing effort— not sales OR marketing.
You will find that marching together toward the same goal is going to be a lot more effective and efficient. While this is a challenge for many companies, it should be a top priority for the leadership team. A mutual understanding between salespeople and marketing people and how they are imperative to the success of a campaign, are essential to any organization’s success. CLV is a great first step to get where you want to go.
Jenn Cline is a sales and marketing strategist at ABC Creative Group. She also consults with the Business Journal News Network. Contact her at jenn@abcideabased.com.